House Hearing, 107TH Congress - The Electric Supply and Transmission Act of 2001

THE ELECTRIC SUPPLY AND
TRANSMISSION ACT OF 2001
HEARINGS
BEFORE THE
SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE
COMMITTEE ON ENERGY AND

COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
H.R. 3406
DECEMBER 12 and 13, 2001
Serial No. 10781
Printed for the use of the Committee on Energy and Commerce
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COMMITTEE ON ENERGY AND COMMERCE
W.J. BILLY TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES CHIP PICKERING, Mississippi KAREN MCCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DEGETTE, Colorado
TOM DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
DAVID V. MARVENTANO, Staff Director
JAMES D. BARNETTE, General Counsel
REID P.F. STUNTZ, Minority Staff Director and Chief Counsel
SUBCOMMITTEE ON ENERGY AND AIR QUALITY

JOE BARTON, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma RALPH M. HALL, Texas
Vice Chairman TOM SAWYER, Ohio
RICHARD BURR, North Carolina ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico BART GORDON, Tennessee
JOHN SHADEGG, Arizona BOBBY L. RUSH, Illinois
CHARLES CHIP PICKERING, Mississippi KAREN MCCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
GEORGE RADANOVICH, California JOHN D. DINGELL, Michigan
MARY BONO, California (Ex Officio)
GREG WALDEN, Oregon
W.J. BILLY TAUZIN, Louisiana
(Ex Officio)
(II)
CONTENTS
Page
Hearings held in Washington, DC:
December 12, 2001 ........................................................................................... 1
December 13, 2001 ........................................................................................... 99
Testimony of:
Acquard, Charles, Executive Director, National Association of State Util-
ity Consumer Advocates ............................................................................... 164
Blake, Hon. Francis, Deputy Secretary, U.S. Department of Energy .......... 21
Breathitt, Hon. Linda K., Commissioner, Federal Energy Regulatory
Commission ................................................................................................... 31
Brownell, Hon. Nora Mead, Commissioner, Federal Energy Regulatory
Commission ................................................................................................... 35
Church, Lynne H., President, Electric Power Supply Association ............... 156
English, Glenn, CEO, National Rural Electric Cooperative ......................... 144
Gent, Michehl R., President and CEO, North American Electric Reli-
ability Council ............................................................................................... 152
Hochstetter, Hon. Sandra L., Chairman, Arkansas Public Service Com-
mission, on behalf of National Association of Regulatory Utility Com-
missioners ...................................................................................................... 105
Hunt, Hon. Isaac C., Jr., Commissioner, Securities and Exchange Com-
mission ........................................................................................................... 99
Hyman, Leonard S., Senior Industry Advisor to Salomon Smith Barney ... 177
Johnston, Robert, President and CEO, Municipal Electric Authority of
Georgia, on behalf of the Large Public Power Council .............................. 179
Massey, Hon. William L., Commissioner, Federal Energy Regulatory
Commission ................................................................................................... 39
McCullough, Glenn L., Jr., Chairman, Tennessee Valley Authority ............ 44
Prindle, William R., Director of Building and Utilities Programs, the
Alliance To Save Energy .............................................................................. 169
Richardson, Alan H., President and CEO, American Public Power Asso-
ciation ............................................................................................................ 134
Rouse, James B., Director, Energy Policy, Praxair, Inc., on behalf of
the Electricity Consumers Resource Council .............................................. 160
Sokol, David L., Chairman and CEO, Mid-American Energy Holdings
Company ........................................................................................................ 128
Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory Commission .. 23
Additional material submitted for the record:
Blake, Hon. Francis, Deputy Secretary, U.S. Department of Energy, letter
dated January 31, 2002, enclosing response for the record ....................... 94
Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory Commission:
Letter dated February 13, 2002, enclosing response for the record ...... 88
(III)
THE ELECTRIC SUPPLY AND TRANSMISSION
ACT OF 2001
WEDNESDAY, DECEMBER 12, 2001
HOUSE OF REPRESENTATIVES,
COMMITTEE ON ENERGY AND COMMERCE,
SUBCOMMITTEE ON ENERGY AND AIR QUALITY,
Washington, DC.
The subcommittee met, pursuant to notice, at 1 p.m., in room
2123, Rayburn House Office Building, Hon. Joe Barton (chairman)
presiding.
Members present: Representatives Barton, Largent, Burr,
Whitfield, Ganske, Norwood, Shimkus, Pickering, Bryant, Walden,
Tauzin (ex officio), Boucher, Hall, Sawyer, Wynn, Waxman, Mar-
key, Gordon, McCarthy, Strickland, Barrett, and Dingell (ex offi-
cio).
Staff present: Jason Bentley, majority counsel; Sean
Cunningham, majority counsel; Andy Black, policy coordinator; Sue
Sheridan, minority counsel; and Rick Kessler, minority professional
staff.
Mr. BARTON. The subcommittee will come to order. If everybody
will find your seat.
I want to welcome the four FERC commissioners that are con-
firmed and our Deputy Secretary, Mr. Blake, from the Department
of Energy and our Commissioner of the TVA, Mr. McCullough. We
are glad to have you folks.
Today, we start 2 days of legislative hearings on a comprehensive
electricity bill, H.R. 3406. This bill is intended to be the subject of
a subcommittee markup next week, assuming that Congress is
going to still be in session next week, which more and more is be-
ginning to look like a good assumption.
I want to ask our witnesses today and tomorrow to be forthright,
to be specific when talking about the bill. This is a legislative at-
tempt to balance all the various stakeholder interests that have
been expressed in numerous hearings over, in the case of my sub-
committee chairmanship, a 3-year period, and if you want to go
back further than that, you could go back 7 years when Congress-
man Schaeffer was subcommittee chairman and did a number of
hearings on this very same issue.
We have spent a great amount of time on both sides of he aisle
in this subcommittee reviewing electricity markets this year and in
years previous to this year. Major lessons that we learn again and
again are part of the bill before us today. No. 1, we must increase,
or at least put incentives to increase, the supply of electricity avail-
able to consumers. No. 2, we must improve the effective operation
(1)
2
of our transmission grid, and more and more thats on an interstate

basis, not just on an intrastate basis. And No. 3, weve got to im-
prove the capacity of our transmission grid.
Today, our witnesses are various Federal officials. We have the
Deputy Secretary of Energy Frank Blake before us again, and we
want to welcome you. We also have, as I said earlier, the four con-
firmed FERC commissioners before us, and we look forward to the
day when the fifth one, Joe Kelliher, who used to be committee
staff counsel, is also on your distinguished panel.
I want to also say that its good to see Chairman Wood here as
chairman. There are those today who are probably going to make
it appear that Mr. Wood and I have some differences, and we may
have some policy differences, but we have no personal differences.
If I can be personal for a minute, I have known Pat Wood for a
long, long time, and I remember three or 4 years ago he and I plot-
ting to get tickets to the Sugar Bowl when A&M was playing Ohio
State. So we go back a ways, and the best part of our relationship,
Chairman Wood, is that the best days are ahead of usyou, as
chairman of your Commission, and hopefully me, as chairman of
this distinguished subcommittee.
Mr. WOOD. And we hope A&M will actually win the Sugar Bowl
next time.
Mr. BARTON. It would be nice if the Aggies would win a bowl
game in our lifetime. I would admit to that.
I expect that we are going to get many questions today about re-
cent actions of the FERC, questions about Regional Transmission
Organizations, market-based rates in connection with RTOs, the
market power screen test, the suitability of transcos in an RTO fu-
ture, things like that.
We also want to welcome our chairman of the Tennessee Valley
Authority. We want to thank you for coming. There is a title in our
bill that has been worked out with Congressman Bryant on the Re-
publican side and Whitfield on the Republican side and Congress-
man Gordon on the Democratic side. I think it is a good title, and
I look forward to what your concerns and comments are on that
particular title of the bill.
Tomorrow, we are going to hear from the SEC. We are also going
to have our usual number of stakeholder participants. And the
problem we have is that we have got lots of stakeholders, and the
table will only hold so many people.
I want to thank Chairman Tauzin of the full committee, Ranking
Member Rick Boucher, my good friend, of the subcommittee, and
also the full committee Ranking Member John Dingell for their
help in scheduling these hearings and their cooperation in helping
us to get witnesses.
After these hearings of today and tomorrow, it is my intent to sit
down and try to sift through all the testimony and see what needs
to be changed so that we can go to markup next week. I would ask
members to prepare suggestions in legislative form for discussion
and be prepared to offer them either to myself, to Mr. Boucher or
have them drafted and ready to go to markup next week. I will be
preparing a managers amendment to incorporate whatever
changes I think improve the bill.
3
I see lots of people here in the audience who we have worked

with for the last few years. It is Christmastime, and so I am kind
of in the spirit of which of you have been naughty and which of
you have been nice. I dont think anybody has been really naughty;
I can almost say I dont think anybody has really been nice either.
So I would say to you that normally Christmastime issome cel-
ebrate Christmas Christmas Eve, some celebrate Christmas morn-
ing, some who are not of the Christian faith celebrate Hanukkah,
but whenever and however you celebrate, I think it would be very
nice for this subcommittee to give a Christmas present early to the
country, to the full committee, if we could work together and pass
a good electricity bill sometime next week.
So with that, I would yield the balance of my time and recognize
my good friend, the distinguished ranking member, Mr. Boucher,
for an opening statement.
[The prepared statement of Hon. Joe Barton follows:]
PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, SUBCOMMITTEE ON ENERGY
AND AIR QUALITY
Today, the Subcommittee starts two days of legislative hearings on comprehensive

electricity legislation, H.R.3406. This bill will most likely be the subject of a sub-
committee markup next week, if the Congress is still in.
Today and tomorrow, I ask witnesses to be forthright and specific when talking
about the bill. Keep in mind that this legislation is an attempt at a balance between
stakeholders and Members, and few compromise bills are universally loved.
The Members of this Subcommittee, on both sides of the aisle, have spent a great
deal of time reviewing electricity markets this year and in years previous. Major les-
sons we learn again and again are part of the bill before us today:
1. We must increasing the supply of electricity available to consumers;
2. We must improve the effective operation of our transmission grid; and
3. We must increase the capacity of our transmission grid.
First, we welcome a very distinguished panel of Federal witnesses. Deputy Sec-
retary Frank Blake is back before us today, and I welcome you. Thank you for your
past work with this Subcommittee on Price-Anderson and your previous testimony
about electricity restructuring.
Next, we welcome back the four confirmed commissioners of the Federal Energy
Regulatory Commission (FERC). I look forward to when you come back with a full
slate of Commissioners. I commend the Presidents great decision when he an-
nounced the intent to nominate Joe Kelliher to FERC.
But back to the four of you. Led by my good friend, Chairman Wood, it appears
you four have been quite busy lately. I expect you will be receiving many questions
from Members today. I, for one, ask you to address recent actions and statements
on Regional Transmission Organizations (RTOs), market-based rates in connection
with RTOs, the market power screen test , the suitability of transcos in an RTO
future, and whatever else we might be hearing about soon.
Chairman McCullough of the Tennessee Valley Authority (TVA) is also here
today. Welcome, and thanks for your help in forging agreement, within the valley,
among TVA, its distributors, as well as large and small customers.
Tomorrow, we will welcome the Securities and Exchange Commission on PUHCA
and a regulator from the State of Arkansas. Following that, we will have our usual
wide table of industry participants and observers.
I want to thank Chairman Tauzin of the full committee, Ranking Member Bou-
cher of the subcommittee, and Ranking Member Dingell of the full committee for
their help in scheduling these hearings and implementing a fair and open process.
I thank all Subcommittee Members for the attention they have given to these
issues.
After this hearing, it will be time to work on changes to the bill. I ask Members
to prepare suggestions in legislative form for discussion and, if not accepted, for of-
fering as an amendment during markup. I will be preparing a managers substitute
amendment incorporating some of the changes discussed today.
As I look out to the audience and to both sides up here, I see lots of people who
have been nice. Not too many have been naughty, at least not all of the time. While
I have no songs for you, I do hear from Santa that one of the packages under the
4
tree is a model kit for a pretty little electricity bill. My parents wouldnt let me open
my presents early, but if we do our homework we just may get to open it next week.
I cant imagine a more legislatively-satisfying holiday season.
Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I ap-
preciate the scheduling of 2 days of legislative hearings by the sub-
committee prior to our taking further action on the chairmans elec-
tricity industry restructuring legislation.
Given the very significant changes that have recently occurred,
both in the market for wholesale electricity and in the regulation
of that market by the FERC, it is appropriate that we take stock
of current circumstances before we take further legislative action.
These hearings provide that opportunity, and I thank Chairman
Barton for honoring the request that we made that these hearings
take place.
I very much applaud the steps designed to strengthen the whole-
sale electricity market, which have recently been undertaken by
the FERC. The Commission has issued notice of a proposed rule-
making to develop a uniform standard for interconnection. It has
acted to ensure membership in broad Regional Transmission Orga-
nizations by companies that own the transmission lines. It has
demonstrated, I think, a commendable determination to make the
wholesale market more functional and more predictable.
To the extent that legislation is needed to reinforce FERCs au-
thority in these areas, we should act. In my view, we should not
take any steps which would impede the progress that FERC is
seeking to achieve in perfecting the market for wholesale electricity
transactions. And I am frankly concerned that some of the provi-
sions in the measure now before us might have that effect, particu-
larly the provisions in the bill that relate to Regional Transmission
Organization membership.
I also question the appropriateness of repealing the FERCs
merger review authority through which the Commission acts to
promote competition and address market power concerns. The re-
moval of merger review authority is all the more troubling when
it is teamed with repeal of the Public Utility Holding Company Act,
an event which inevitably will lead to greater industry consolida-
tion and heighten concerns about the potential to misuse market
power. Under these circumstances, the FERCs merger review au-
thority may be more needed in the future than it is even at the
present.
There is a clear need to encourage the construction of new trans-
mission lines in many places around the Nation. The bill seeks to
address this need through the creation of incentive pricing for new
transmission lines and by conferring Federal authority to site new
lines in instances in which the States deny approval for that con-
struction. Both of these provisions are highly controversial. I will
welcome the views of our witnesses, both today and tomorrow, on
whether other approaches can achieve the goal of new transmission
line construction.
In particular, I am interested in knowing whether Regional
Transmission Organizations can encourage the needed investment
under regular pricing without the use of incentive pricing. I am
also interested in learning about instances in which those sup-
porting Federal siting authority believe that States have acted ar-
5
bitrarily in balancing the need for new transmission against the

other values that States have an obligation to consider. I am per-
sonally unaware of any such instances, and we did in fact inquire
about such instances in previous hearings.
The chairmans measure focuses on a range of other complex
matters, including the balance between State and Federal jurisdic-
tion over transmission, transmission reliability, Federal authority
over public power entities in certain circumstances and the repeal
of PURPA. While I have reservations about many of the bills provi-
sions, I want to commend Chairman Barton for his single-minded
persistence in working to achieve a landmark reform in our Na-
tions electricity laws and for placing before this subcommittee a
comprehensive measure that addresses the most relevant topics.
I look forward to continued conversations with the chairman and
with other members of the subcommittee as we continue to con-
sider the best means of addressing the wholesale electricity market
and its related concerns. Thank you, Mr. Chairman, and I want to
welcome our witnesses, and I very much look forward to their testi-
mony.
Mr. BARTON. The Chair would thank the gentleman from Vir-
ginia for that statement. It is the Chairs intention to continue
opening statement. Mr. Shimkus has gone to vote and hopefully
will be back so that we can continue without having any interrup-
tion. The Chair would ask if Mr. Bryant wishes an opening state-
ment.
Mr. BRYANT. Yes. Thank you, Mr. Chairman; I have one. I would
also like to thank you for holding todays hearing on H.R. 3406 and
commend you for inviting such a distinguished panel of witnesses
representing the Federal perspective on the electricity restruc-
turing legislation. I especially look forward to my friend, Glenn
McCullough, testifying, who is the chairman of the Tennessee Val-
ley Authority, and I am sure Chairman McCullough would agree
that among the residents living in the Valley there is an if it aint
broke, dont fix it mentality toward such legislation as restruc-
turing our Nations electricity market.
However, as Americas largest public power company, TVA has
I should say Americas largest public power company, TVA, has
provided reliable, low-cost power to all of us in the Valley for near-
ly 70 years, and we are happy with the services TVA provides.
However, there is a nationwide movement toward a more competi-
tive electricity market. Several States have already deregulated
their wholesale electricity markets, and times are changing. TVA
must be prepared to change with them.
To prepare for life in a more competitive market, TVA, the re-
gions 158-power distributor to its customers, and industrial users,
after much negotiation, have reached a consensus on a TVA title.
The title, this consensus title, would allow the distributors to re-
negotiate the contracts with TVA and to buy some power outside
of the seven-state region or the so-called fence of TVA, which will
help meet the growing demand from Valley consumers.
In addition, the title would permit TVA to sell excess power at
a wholesale level outside the fence, which they cannot currently do.
Additionally, TVAs 17,000 miles of transmission would come under
the regulation of FERC for the first time. This would help FERC
6
in their effort to form Regional Transmission Organizations to fa-

cilitate the reliable flow of power.
I feel that H.R. 3406, the Electric Supply and Transmission Act,
is the most appropriate vehicle for the TVA title, and I commend
Chairman Barton for recognizing what is in the best interest of the
Tennessee Valley and including the consensus agreement as the
TVA title in H.R. 3406. I know there are some in the power indus-
try who want to compete with the Valley on a one-way basis. These
interests seek to create a market that favors their utilities and that
will put TVA at a competitive disadvantage. I ask my colleagues
on the subcommittee to recognize the efforts of the stakeholders
throughout the Tennessee Valley and oppose them when the time
comes up for this vote. It is very important to my constituents that
the Valleys stakeholders be allowed to control the regions destiny
in a restructured market.
Again, I thank the chairman for his work on the electricity re-
structuring issue, which I know is so important to him. And, fur-
thermore, I want to thank him for his work on behalf of the resi-
dents and the numerous States involved in the Tennessee Valley.
Thank you.
Mr. BARTON. Thank the gentleman from Tennessee and recognize
the distinguished gentleman from California for an opening state-
ment.
Mr. WAXMAN. Thank you, Mr. Chairman. The bill we are consid-
ering today is called Electric Supply and Transmission Act. I think
a better name might be the One Last Gift for Enron Act. This fol-
lows the $254 million gift to Enron in the Republican stimulus bill
and the long wish list of subsidies, tax breaks and deregulation
provisions Enron received in the House energy bill. Enrons finger-
prints are all over the legislation we are examining today. This bill
essentially Federalizes the Nations electricity transmission grid
just as Enron had advocated for years.
Five and a half years ago, Enron CEO Ken Lay testified before
this subcommittee and derided those who argued against Enrons
vision of the future. He testified that we did not need to listen to
those who argued that Enrons plan was untried and too risky or
that we needed to go slow. He ridiculed the arguments that service
will deteriorate or reliability will be put at risk. Mr. Lay testified
that competition in the electricity markets would cause great
things to happen. Consumers would benefit handsomely, the envi-
ronment would be protected, and of course Enron would make a lot
of money.
Mr. Lays vision turned out to be dramatically wrong. California
and the West have suffered from skyrocketing energy prices. A new
report from the Consumer Federation of America, which I ask
unanimous consent to introduce into the record, documents double-
digit rate increases in Massachusetts, a 40 percent increase in New
York and a 50 percent rate increase in Montana over the last year.
There has even been evidence of market abuses in Pennsylvania.
And, of course, Enron itself is now in bankruptcy. Mr. Lay and
other Enron executives essentially looted the company, while leav-
ing employees and shareholders with nothing. Even the environ-
ment seems to be suffering. As a result of restructuring, emissions
7
of nitrogen oxides and carbon dioxide were significantly higher last

year than FERC had projected just a few years ago.
The legislation we are considering should be put on display in a
museum. It is an artifact of the era when corporate America
swooned at the mention of Enrons name. I think we need to go
back to the drawing board. The last thing we ought to do now is
pass another law that makes it easier for top executives to steal
and swindle millions of dollars from their workers and share-
holders. First and foremost, we need to figure out how to prevent
future energy collapses like Enron. The answer will require more
regulation and oversight of energy marketers, not more deregula-
tion like this legislation proposes.
We also need to be focused on how we ensure that electricity is
reliable, clean and affordable. This will require doing more to pro-
mote conservation and renewable sources of energy. Even before
the collapse of Enron many States were reconsidering restruc-
turing. Of the 25 States that have decided to restructure, three
electric utilities, nine are now reconsidering their decisions. Ne-
vada even repealed its deregulation law of April 2001.
I am glad we are holding todays hearing, but clearly we need to
hold many more before we consider moving legislation. As many
people have remarked, September 11 changed our world. In its own
way, December 2, the date Enron filed for bankruptcy, fundamen-
tally changed how we need to think about energy policy. This
should be a time for deep rest, deliberative reevaluations, not a
headlong rush to legislation to preconceived ideological theories
that fly in the face of the disastrous reality Enron-style deregula-
tion is inflicting on millions of Americans. Thank you very much,
Mr. Chairman.
Mr. SHIMKUS [presiding]. Thank you, Mr. Waxman. Just to in-
form the panelists, what I plan to do is conduct my opening state-
ment, see if other members filter back from the votes. If no one
gets here in time, then we will kind of recess in place until every
member gets an opportunity, and then we will go to the opening
statements. That is per direction of the chairman.
So I, too, want to thank the panelists here today, although I
dont totally agree with my colleague from California. I have sat
through more energy hearings than the years that I have been
alive, seems like. And I have only been a member 5 years, so we
have reallythose of us who have been on this subcommittee for
the past five or 6 years, I think we have got a pretty good handle
on energy.
But be that as it may, I will start with a prepared statement and
just say the Federal role in our Nations electricity system is an im-
portant one. For years, it has worked to ensure that our Nation has
reliable and affordable power, but the system that generated and
delivered that power has changed dramatically, and the Federal
Governments role has to change to meet the challenges of this new
system.
Illinois is a very unique State. We have a deregulated market
that will allow consumers to choose their energy supplier in the
coming year. We lead the Nation in electricity produced by nuclear
power. We are among the leaders in the amount of electricity gen-
erated from coal. Greenpeace released a study last month saying
8
that Illinois is the fourth in the Nation in the amount of planned

power from solar electric systems, and Illinois will soon become a
major player in electricity generated from wind power. On top of
all that, there is a project in my district to create a hydroelectric
dam.
Illinois has a truly diversified energy portfolio. The problem is
how do we get all this low-cost power to consumers? And that is
what I think we are here for to discuss. The answer is trans-
mission. This legislation provides incentives and an environment to
expand and update our Nations transmission grid. It provides for
a process for transmission siting that wont create a bottleneck at
the States borders, similar to what we saw with natural gas pipe-
lines at the California border. We have utilities in Illinois that are
begging to new transmission but are being forced to stop these
lines once they hit the State borders. This bill will remedy that.
And I say, constitutionally, in the interstate commerce clause, this
is interstate commerce.
The bill also allows for open access to transmission for all trans-
mitting utilities. If we are to have a truly national grid that is reli-
able and offers a seamless way to move power from one part of the
country to another part, then it is important to have equal and
open access to all transmission. The RTO provisions in this legisla-
tion mandate participation in an RTO but doesnt set a specific
number of RTOs. I believe this is the correct approach. RTOs are
needed to facilitate an open transmission system to move power
easily from one place to another.
This legislation has a number of other provisions aside from
what I have mentioned, but I wanted to focus on transmission, be-
cause it is most important to me. I look forward to addressing
these and other issues in these hearings, and when we mark up
this legislation hopefully before we leave before the Christmas
break.
And with that, I will yield back my time, and I will now recog-
nize the gentleman from Iowa, Dr. Ganske, for 5 minutesfor 3
minutes.
Mr. GANSKE. Thank you, Mr. New Chairman. I want to thank
the Deputy Secretary, the FERC commissioners, the chairman of
the Tennessee Valley Authority for joining us today, as well as the
witnesses who will join us tomorrow, in particular, Mr. David Sokol
of Mid-American Energy Company, which helps to supply energy in
my Iowa district. I appreciate all of you for taking time to address
the committee.
We have an obligation to help assure that our power generation
system is ready to supply a reliable source of electricity, both for
our own safety and for the productivity of our economy. The trans-
mission system in our country is crucial in guaranteeing a con-
sistent and uninterrupted flow of power to our cities, towns and
rural communities. Recent events have magnified the concerns that
we have about our power supply, but even before those events
there were many steps which needed to be taken to improve our
power grid and our transmission capabilities. Our electricity power
grid is an essential part of the American economy and of our basic
infrastructure.
9
I strongly believe we need to promote the use of renewable re-

sources. My State of Iowa has been a leader in the development of
wind energy power. I believe it is a clean, practical source of energy
which can be utilized to a much greater extent than it currently
is. Iowa is tenth in the country in the potential for utilization of
wind resources, but we are currently third in the amount of wind
energy produced. Wind turbines in Iowa already produce enough
energy to power more than 60,000 residential homes. I know that
in more temperate areas of the country solar power holds more po-
tential.
The provisions of this legislation which would encourage the use
of net metering systems around the country are a positive step to-
ward making the use of solar and wind generated power a more
practical alternative to the small producer. Net metering can play
an important role in facilitating the development of wind and solar
power by small producers. I commend the chairman for his leader-
ship in including this section in the legislation, and I plan to work
with him in offering an amendment during the markup, which I
hope will serve to clarify a couple of the provisions.
I thank the chairman, and I yield back my time.
Mr. SHIMKUS. The gentleman yields back his time. Chair recog-
nizes the other doctor, from the great State of Georgia, Dr. Nor-
wood.
Mr. NORWOOD. Thank you very much, Mr. Chairman. I would
like to simply place my opening statement in the record, and per-
haps you would reserve the amount of time I would have used for
an opening statement and extend the amount of time I will have
for questions.
So if you will do that, I will yield back to you.
Mr. SHIMKUS. I would say that is above my pay grade, so you
will have to negotiate.
With that, seeing no other members present, we are going to ask
the panelists and our guests to recess in place until we come back.
[Brief recess.]
Mr. BARTON. The subcommittee will come to order. Congressman
Hall will stop meeting and greeting. Was Congressman Shimkus
the last one to give an opening statement, do we know? Ganske?
So the last one was a Republican? Okay. The Chair would recog-
nize Mr. Sawyer for an opening statement.
Mr. SAWYER. Thank you very much
Mr. BARTON. The Chair is in error, and Mr. Markey was in at-
tendance before Mr. Sawyer. The Chair would recognize Mr. Mar-
key for a non-musical opening statement.
Mr. MARKEY. The theme is movies today, okay? You know, at the
very end, Mr. Chairman, of the 1942 Hollywood classic, Casa-
blanca, Captain Renault, the French police inspector, played by
Claude Raines, has just pulled up to the crumpled body of the Nazi
officer that Humphrey Bogarts character just killed. He jumps out
of his car and says, Major Strasser has been shot. Bogart looks
at him with expressionless eyes, and Renault turns to his gen-
darmes and says, Round up the usual suspects. That is kind of
what we are doing here today, Mr. Chairman.
In May, the majority pulled the plug on its markup of Califor-
nias emergency electricity legislation. In July and August, the ma-
10
jority short-circuited efforts in the committee and on the floor to

address the electricity problems taking place in the West as part
of the comprehensive energy package. And so today we are round-
ing up the usual suspects to interrogate them yet again in a proc-
ess which at this point appears increasingly unlikely to result in
enactment of any public law.
Meanwhile, in a hearing room right across the hall from here, in
the Banking Committee, another feature is headlining. It involves
the dramatic implosion of a company called Enron. Last year, the
company was No. 7 on the Fortune 500; today, Enron is essentially
a penny stock company reduced to bankruptcy. What happened?
Where did all the money go? This little drama is a tale of greed
and ambition with multiple plot twists, elaborate deceptions, vil-
lains and victims. It includes complex deals with mysterious in-
sider partnerships dubbed JEDI, Chewbacca and Raptor. What a
hearing, huh?
These are accountingthere are accounting firms with apparent
amnesia about their public responsibilities and scores of Enron em-
ployees who have just seen their retirement savings evaporate as
they stood helplessly by unable to shift funds into other invest-
ments.
So I would ask, is this subcommittee going to hold any hearings
on the Enron debacle before it proceeds to mark up an electricity
bill? It seems to me there are many lessons that this subcommittee
could learn from what went wrong with Enron. Are we going to
thoroughly investigate what happened to Enron and what it means
to emerging electricity markets? Or are we going to engage in the
absurd pretense that the collapse of what was once the Nations
largest electricity and natural gas marketing company has nothing
to do with our electricity markets? Does anybody think that if
Enron had been the subject of greater regulatory oversight, such as
the types of rules that we require for traders in securities, traders
in futures or other financial intermediaries, that the types of finan-
cial shenanigans that occurred and took place would have been al-
lowed to occur? I think not.
In the aftermath of the Enron collapse, I think that we need to
look very seriously at extending some greater oversight over the
trading of electricity. Right now the bill we have before us does not
address this issue. Mr. Chairman, I ask unanimous consent to ad-
dress the committee for 1 additional minute?
Mr. NORWOOD [presiding]. Any objection? Mr. Markey, the chair-
man objects. We need to get through this so everybody will have
a turn. We have a lot of witnesses we want to hear from.
Mr. MARKEY. I know, I know, a lot of witnesses. I appreciate it,
I appreciate it.
Mr. NORWOOD. Mr. Sawyer, you are recognized for 3 minutes.
Mr. MARKEY. Excuse me. Oh, did anyone object?
Mr. NORWOOD. I did.
Mr. MARKEY. You objected, Mr. Chairman.
Mr. NORWOOD. Yes.
Mr. MARKEY. Why is that?
Mr. NORWOOD. Because we have a lot of witnesses we need to
hear from, and all of us are going to read the record to finish lis-
tening to your statement.
11
Mr. MARKEY. No, but Mr. Chairman, let me askpoint of per-

sonal privilege, Mr. Chairman. I did not schedule this hearing for
1 in the afternoon. You cant persecute the persecuted, okay? You
are basically now holding the minority accountable for the sched-
uling tactics of the majority. Now that is not fair to us to wait for
weeks to have a hearing like this and then to tell us that we cant
be extended 1 additional minute. That doesnt show any good grace
or courtesy on your part.
Mr. NORWOOD. It doesnt show any good grace to extend over the
time that we have all agreed to either. Mr. Sawyer, you are recog-
nized for 5 minutes.
Mr. MARKEY. You are noted for your good grace, Mr. Chairman.
I mean it is a personal trait that you hold dear, I thought, and here
it is that you are making an exception only because, I would hate
to say it, but it seems to be personal, and the subjects which I am
raising seem to bring personal pain to you. And it is not that I
mean to have you pointed out as the person not having the hearing
on Enron, it is only that I just wanted to finish what I thought was
a relatively humorous and
Mr. NORWOOD. Mr. Markey, you now have your other 1 minute.
Mr. Walden, you are now recognized for 3 minutes.
Mr. MARKEY. Mr. Chairman, you have moved from the jocular to
the jugular here, unnecessarily, okay? I was keeping it in a rel-
atively light vain rather than
Mr. NORWOOD. Mr. Walden, you are recognized for 3 minutes.
Mr. WALDEN. Thank you, Mr. Chairman. I would like to hear
from the witnesses, so in essence of time, so we can get on to the
subject at hand, I will waive the opportunity for an opening state-
ment and would appreciate time during questioning. Thank you,
Mr. Chairman.
Mr. NORWOOD. Mr. Sawyer, you are now recognized for 3 min-
utes.
Mr. SAWYER. Thank you, Mr. Chairman. The struggle that we
are all going through in trying to establish functional, stable elec-
tricity markets is an important one. We cant just sit back and
hope that markets will emerge of their own accord. They simply
wont function without an appropriate regulatory framework to
support them, and these hearings are an important step toward es-
tablishing them.
We are in the middle of an historic transformation of vertically
integrated utilities to a system of nationwide wholesale competition
and retail competition in about half the States, merchant genera-
tors and soon RTOs. This is based on the straightforward idea that
modernizing regulation to move power from low-cost producers to
end consumers in a competitive market can result in cheaper and
more reliable electricity. But if we are going to fulfill that promise,
it seems to me we need to take steps now to update a transmission
system that has not kept pace with the changes in the way elec-
tricity is generated and regulated.
Wholesale competition has dramatically increased the number of
transactions and the amount of electricity being sent along a make-
shift grid that was designed decades ago to handle a smaller num-
ber of point-to-point transactions. At the same time, investment in
new transmission has declined by an average of about $117 million
12
a year, each and every year since 1980, and the decline is actually
longer than that. It is, in short, a system in long, slow atrophy. The
result has been predictable. Congestion, rising electricity prices,
the lurking risk of blackouts as transmission gets caught in bottle-
necks.
This is a recognition that in order to create functioning, competi-
tive markets, we need to address several issues. First, we need to
redress the decline in investment in transmission. Transmission is
no longer the low-cost, country cousin enterprise that it used to be.
We need to bring rates of return in line with higher risk involved
in providing transmissionprovided that transmission assets are
controlled independently to assure open access to generators.
Incentive and performance-based rates, a concern to some, do not
have to be a giveaway to the electric industry; rather they are a
smart investment, properly managed, to create viable, independent
transmission business and to make up for the shortage in capacity
in this country. Innovative rates have the potential to end up low-
ering electricity costs by getting rid of the price distortions caused
by transmission bottlenecks. That is not simply theory; we have ex-
perience of that in the not too distant past.
Second, we have got to encourage demand management pro-
grams through the use of new technologies to expand the capacity
of existing rights-of-way. I also believe there needs to be some form
of backstop Federal authority in siting. Providing for new lines is
an important part of relieving identifiable bottlenecks, and giving
the States time to do that, after which the FERC would have the
authority to approve projects if the States have not been able to do
so, I think is an important component.
Fourth, and finally, I believe we need to establish a single man-
datory national reliability organization to create and enforce tech-
nical reliability standards that do not endanger the stability of the
grid. Moreover, I would hope that they would be empowered to cre-
ate procedures to safeguard the grid itself against terrorist attacks.
I look forward to hearing from our witnesses. Thank you for your
flexibility in time and yield back whatever may remain.
Mr. NORWOOD. Thank you very much. And now I would like to
recognize our distinguished chairman of the full Commerce Com-
mittee, Mr. Tauzin.
Chairman TAUZIN. Thank you, Mr. Chairman. I want to thank
Chairman Barton for calling this hearing and for moving on this
process. This has been a labor of love for the chairman of this sub-
committee, and I want to encourage you all in this endeavor. Mr.
Barton has worked for a long and hard time crafting an Electric
Supply and Transmission Act, which we are going to hear com-
ments and suggestions and analysis on today. And I want to thank
him for that effort.
This is an attempt, literally, to comprehensively deal with the
questions of supply and transmission. Regardless of how you feel
about energy markets and whether they work or dont work or
whether deregulation crafted properly can work well and crafted
improperly, as we saw in California, can be an absolute failure, we
know two things: That if there isnt an adequate supply and if that
supply cannot be moved properly, that not only will the markets
fail but any attempts to properly deregulate are not going to suc-
13
ceed. And so Mr. Barton has set upon a course that hopefully will
take this subcommittee forward in producing for our committee and
for the Congress a piece of legislation designed to ensure those two
elements are as abundantly available to Americans as possible.
You know, until recently, electricity was sort of taken for grant-
ed. I saw a poll in California where people were asked where elec-
tricity came from, and awfully high percentage said, From the
wall. I also saw a poll that said when people were asked about the
gasoline spikes in this country, they said, Isnt it remarkable that
the gas companies knew just where to put those stations right on
top of the gas supplies?
There is a lot of misunderstanding about electric markets and
energy markets in this country, and we all assumed that when you
turned the switch on electricity was going to be there. We never
had to worry about it. Absolutely reliable. And then we saw the
shortages in California and the West, and we saw what tremen-
dous economic havoc it can cause to a region of the country that
is so important to our Nation. We just cant have that happen
again, and we cant have it happen in other parts of the country.
In a few weeks, we begin the year 2002. It will have been 10
years, a whole decade, since Congress enacted major energy legisla-
tion, which was the Energy Policy Act of 1992. In that time we
have seen competitive electric markets struggle to take hold. We
have also seen more clearly the vital connection between our Na-
tions economy and a clean, affordable, reliable electric supply. And
we have come to recognize what is necessary to update the electric
system for future economic growth.
We learned, for example, that the four main structures of the
Internet system in this country, when looked at in toto, consume
as much energy as the entire country of Italy consumesabout 8
percent of our national total. For that economy to grow, we had
better have reliable sources of electricity and reliable means to de-
liver them to the parts of the country that require them.
So it is time for Congress to address the issue again. It is just
that simple. And when we passed comprehensive national energy
policy legislation earlier this year, we made it very clear we would
be moving electricity at a later date. The later date is here.
As a Nation, we cant rely upon the FERC alone to do this for
us. Well, the simple truth is that on occasion FERC may think they
can solve all these problems, but there is only so much they can
do. We in Congress must give them guidance, and we must give
them the tools that they need to make sure that American rate-
payers are protected and assured of affordable electric supplies for
the next 10-year period and beyond.
FERC can help us determine what to do, and that is why I am
very interested in what our FERC commissioners will say about
this bill today and why I am very pleased that you are here and
ready to help us think through the policy that will help you and
us work through the right answers.
I want to welcome Chairman Wood, and we have had a private
meeting before, and I want to thank you for agreeing to serve the
country in a hot spot. This is a tough one. And for all of you on
the Commission. We all know these are going to be tough decisions
as we move from regulated markets and shortage markets to more
14
abundant and flexible markets in the electricity marketplace of

America.
I want to also welcome Deputy Energy Secretary Frank Blake
again before our committee. We always appreciate your work with
us, Frank, and
Mr. MARKEY. Mr. Chairman? Mr. Chairman? I would like to
make a unanimous consent request, Mr. Chairman, that the gen-
tleman from Louisiana be allowed to consume as much time as he
desires in his opening statement.
Chairman TAUZIN. Actually, if my time is up, I am going to wrap
in one word, and that is I also want to welcome the TVA chairman
Mr. McCullough, to the subcommittee and look forward to hearing
all your testimony. I yield back any time that I may have improp-
erly consumed.
Mr. NORWOOD. It has been an observation, generally, that the
chairman of the full committee does get about whatever time they
wish to consumer. Mr. Gordon, you are recognized for 3 minutes.
Mr. GORDON. Thank you, Mr. Chairman. I think we have already
had one interruption today with a vote. I am going to put my com-
ments in the record so that we can move forward with these wit-
nesses. I dont want them to caught again.
Mr. NORWOOD. Thank you, Mr. Gordon. Mr. Whitfield, you are
recognized for 3 minutes.
Mr. WHITFIELD. Mr. Chairman, I know you will be disappointed,
but I am going to waive my opening statement.
Mr. NORWOOD. Actually, I am disappointed, Ed, but I accept
that. Mr. Hall, you are recognized for 3 minutes.
Mr. HALL. Mr. Chairman, I guess I am pleased that we are con-
ducting these hearings. I have mixed emotions about it. I think the
one good thing that can come out of it is to get some detailed com-
ments on the language of this legislation from the folks that are
in front of us here. All of us know a lot has happened in the 2
years or so since we marked up 2944 in this subcommittee. For
some, like California, it has been agonizing. I remember earlier in
the year how we dreaded to see August hit. August was lurking out
there, and luckily we had a fairly mild August. We are learning in
Texas, and it is not easy. And at the Federal level, we have begun
to zero in on dealing with the essential Federal issues.
For the most part, I think they are reflected in this legislation,
and while I dont think for a minute this is a perfect bill, I think
it is a good enough bill to move to the full committee. I know the
concerns of the coops, of public power folks, of State commissions
and a lot of others, and hopefully we can work out ways to find
ways to deal with their concerns in this legislation.
One, I hope that we can get some stability and certainty to the
electric power industry and customers. I think I have used about
a minute and a half. Would I get in trouble with the chairman if
I wanted to offer to my friend from Boston my last minute and a
half?
Mr. NORWOOD. Well, after what you said about him in the last
hearing on nuclear energy, I think you ought to, and it is certainly
agreeable with
Mr. HALL. Well, all right. I really want to do that.
Mr. NORWOOD. Go ahead.
15
Mr. MARKEY. You know, I just want toI would like to say that
if you looked up the word graciousness in the dictionary, Ralph
Halls picture would be next to it. You know what I mean? This
man is just the embodiment of the wonderful spirit of collegiality
that has always characterized this committee. And I just want to
say how honored I am to serve with you and despite the fact that
you come from Texas, there is a great deal of admiration. If we
dont produce anything up in Massachusetts, we produce a lot of
admiration for the gentleman from Texas, and I
Mr. HALL. Can I ask you something?
Mr. MARKEY. I will be glad to yield to the gentleman.
Mr. HALL. Are you about to do me like those two boys did the
Sierra Club? They had their meeting, and they had Santa Clause
there and a little boy on each knee, and one of them said, told
Santa, he said he wanted for Christmas a bird feeder, and all those
Sierra Club people clapped. They love people that love little birds.
And the other one said, And a couple of BB guns.
You are not going to do me like that, are you?
Mr. MARKEY. Where am I going now? You know, somebody has
to be Ed McMahon. Anyway, it is just great to have you all here
today.
I see vast amounts of billable hours out here, and we cant be-
lieve what they are saying. They are really talking about marking
up right before we break for Christmas. And it is like a Godsend,
there is like hundreds of memos being faxed to energy companies
all over America putting them on alert that this committee may be
thinking about marking up
Mr. NORWOOD. Mr. Hall, do you wish to reclaim your time now
that the time is up?
Mr. MARKEY. I think we should have the SEC investigate all
these people sitting out here collecting for what they are doing
today. Anyway, thank you, Mr. Chairman.
Mr. NORWOOD. The Chair would like to now recognize Mr.
Largent for 3 minutes.
Mr. LARGENT. Thirty minutes?
Mr. NORWOOD. Three.
Mr. LARGENT. Oh, 3 minutes. Thank you, Mr. Chairman. I do
want to commend Mr. Barton for holding the hearing today on to-
morrowsand tomorrows legislative hearings on the recently in-
troduced bill, H.R. 3406, the Electric Supply and Transmission Act
of 2001.
As many in this room know, one of my greatest concerns when
it comes to restructuring is how do we ensure an open and trans-
parent wholesale transmission market? There are transmission
constraints throughout the system. Probably one of the most nota-
ble is the Path 15 that runs the length of California. The con-
straints are only magnified by the various forms of regulation of
the grid. I think the word picture that comes to mind when think-
ing about the grids current regulatory structure is swiss cheese.
I know that FERC commissioners here before us today share
similar concerns, as evidenced by their recent rulemakings and or-
ders. And with that, Mr. Chairman, I want to yield back my time
and insert my entire statement for the record; look forward to this
hearing.
16
Mr. NORWOOD. So ordered. Thank you, sir.

Mr. NORWOOD. Ms. McCarthy, you are recognized for 3 minutes.
Ms. MCCARTHY. Mr. Chairman, I am going to put the bulk of my
remarks in the record, if you wouldnt mind, and I thank you and
Ranking Member Boucher for holding this hearing. And I am very
much appreciative of the panels efforts to educate us on the need
to protect our national security and take a look at diversity and
conservation and reliability and certainty in our electric energy de-
livery system. I hope this committee will take a look at distributed
generation of renewable energy sources that can also be a viable
way to supplement our grid and diversify the Nations energy sup-
ply, because I do think diversity is the key to the future as we ad-
dress electric energy needs and also global climate change.
I would like to yield back the balance of my time, Mr. Chairman,
and just put the extent of my remarks into the record.
Mr. NORWOOD. So ordered. Thank you, Ms. McCarthy.
We will postpone just for a second till the chairman gets here.
He wants to do the introductions of the panel. I expect him here
any second.
Mr. MARKEY. Mr. Chairman, could I be recognized while we are
waiting? I have like 1 more minute to go.
Mr. BARTON. Has Mr. Dingell been given an opportunity to have
an opening statement?
Mr. DINGELL. Mr. Chairman, I thank you. Mr. Chairman, I un-
derstand that, first of all, my own concerns about the Enron situa-
tion and the wisdom of proceeding with the markup before weve
thoroughly examined the debacle that occurred in that matter have
already been raised by Mr. Markey and Mr. Waxman. I think it is
regrettable that Mr. Markey was not given an additional minute to
conclude his opening statement, because I think it would have been
of value to us in our consideration of this matter.
I would be happy to yield Mr. Markey a minute of my time, be-
cause I share his concerns about Enron and the future of the elec-
tricity markets. I have a fine statement that I will be happy to sub-
mit for the record in order to enable the committee to accommodate
Mr. Markey and to perhaps get into the question of some of the
rascality and misfortunes that have been inflicted on so many peo-
ple by the Enron debacle. While we are talking about whether or
not PUHCA and other Federal regulatory statutes should be re-
pealed, modified and so forth, given the misfortunes and failures
and, quite frankly, the obvious abuses and perhaps even criminal
misbehavior of the Enron matter.
So I ask unanimous consent for two things, Mr. Chairman: One,
that I be permitted to revise and extend my statement and include
it in the record, and, two, that the balance of my time be yielded
to Mr. Markey.
Mr. BARTON. Will the gentleman yield?
Mr. DINGELL. I am happy to yield.
Mr. BARTON. We have the tradition on this subcommittee of let-
ting the ranking member of the subcommittee and the full com-
mittee speak, I wont say forever, but I try not to cut our senior
membership off. So the gentleman from Michigan, as the ranking
member of the full committee, really has such time as he may con-
sume. And if he wishes to yield that to the distinguished member
17
from Massachusetts, that is fine with me. I dont want us to get

into a tizzy here before we even hear from our distinguished panel.
So I am open.
Mr. DINGELL. Mr. Chairman? Mr. Chairman, I knew that your
natural grace and dignity and charm and ability and the very fine
conciliatory character that you have always displayed in your ca-
pacity would encourage you in that direction, and I want to express
to you my thanks.
Mr. BARTON. So do you wish to yield to the gentleman from Mas-
sachusetts?
Mr. DINGELL. At this time, I would ask unanimous consent I be
permitted
Mr. BARTON. You dont even have to ask unanimous consent; you
just yield to him, and we will put him on his good graces to be his
naturally charming self in an expeditious fashion.
Mr. MARKEY. Thank you, Mr. Chairman.
Mr. DINGELL. As always, Mr. Chairman, you are gracious, thank
you.
Mr. MARKEY. You are gracious, Mr. Chairman. I thank you. And
I think Mr. Hall is kind of the master of the metaphor of the par-
able within which the truth emerges, and I think his story about
the rabbits and the BB gun kind of have a certain truth.
And I was thinking what would be the analogous metaphor
which I would use, and it came to me, and its this: Its the story
of the mother with her two children, and they were at the zoo, and
the children went into one of the cages and they saw a lion laying
with a lamb, and they were remarking on how beautiful it was.
And the mother was exclaiming that it was the biblical fulfillment
of the prophecy of the lion and the lamb laying together peacefully.
And along came the zookeeper, and the mother was just saying
how beautiful it was to see the lion and the lamb lying together.
And the zookeeper said, Hey, lady, dont get excited. Weve got to
put a new lamb in every day.
And so this legislation that we debateand Mr. Dingell and I
and I think most on our side share this viewin my opinion is
heading toward the point where we will just be feeding more lambs
into a system which, unfortunately, is broke and that we are not
going to be providing the powers to the FERC which they are going
to need in order to protect the lambs, the upstarts, the consumer,
the competitors, those that want to have a full place within this en-
ergy electricity structure, and we hope that this hearing will help
to illuminate those deficiencies. I yield back the balance of my
time.
Mr. BARTON. Does Mr. Dingell wish to continue his opening
statement?
Mr. DINGELL. Youre so gracious that I will simply rely on my au-
thority to insert this in the record.
Mr. BARTON. Without objection.
Are there any other members who have not yet had an oppor-
tunity to present an opening statement? Hearing none, the Chair
would ask unanimous consent that all members not present have
the requisite number of days to put their opening statement in the
record.
[Additional statements submitted for the record follows:]
18
PREPARED STATEMENT OF HON. HEATHER WILSON, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW MEXICO
Mr. Chairman, thank you for holding these final hearings on electricity and the
electric power industry and for bringing together these excellent witnesses on elec-
tricity issues.
The issue of electric transmission policy is very important and it is an integral
part of our energy policy. The transmission grid is an integral part of our energy
infrastructure and we need a strong, reliable, flexible energy grid to move our elec-
tricity. The events in California this past year are evidence that we need to make
positive changes to ensure that there is an adequate supply, sufficient transmission,
improved reliability, reasonable cost of our nations electricity.
I applaud the Chairman of this Committee for setting out the draft of this bill
months ago and asking for input. There are provisions in this bill that I like and
some that I have some concerns about, particularly issues impacting states rights
and the rural electric cooperatives. It appears to me that there are a number of pro-
visions in this bill that FERC has authority to act onthey do not need additional
authority. (Examples. RTOs and incentive rates.)
Electricity markets are regional in character. They are defined by the three elec-
trically-separate interconnections. The Western Interconnection includes all or parts
of 14 western states and western Canada and northwest Mexico. Regional markets
require regional solutions.
States have and will continue to be major players in this nations electricity pol-
icy. I seek cooperative approaches that will encourage coordinated state and federal
action, not federal preemption of states.
One of our challenges is to enable states and FERC to collaborate on regional elec-
tricity issues. FERC has recognized this need in their November 9 order. We need
to amend HR 3406 to build on FERCs initiative.
The some of the issues that need to be addressed are:
We need to amend the reliability provisions to provide states, when acting on a
regional basis, significant say in the design and enforcement of reliability stand-
ards.
We need to delete Section 402 that gives FERC the power to preempt states on the
siting and permitting of transmission facilities. FERC does not have the exper-
tise, resources or local knowledge to make transmission siting and eminent do-
main decisions. This provision is not needed in the West. No western state has
ever denied a permit for an interstate transmission line. The major challenge
to permitting new transmission in the West is getting rights-of-way across fed-
eral lands.
We need to rethink the preemptive powers HR 3406 would grant FERC and the
Federal Trade Commission in the areas of interconnection standards, net meter-
ing, demand response and consumer protection.
In the case of interconnection standards, FERC may already have sufficient au-
thority.
In the case of demand response, many programs were put in place during the
Western electricity crisis. We are now getting valuable information from those
measures and states will be able to incorporate such information into their own
measures. Even within the West, there are important differences among the
states that need to be recognized. In the Northwest, which is reliant on hydro-
electric generation, reducing total energy use is typically more important that
cutting peak load. Uniform FERC standards would not recognize such dif-
ferences.
In the case of consumer protection, states, particularly those that have moved to
retail competition, largely have in place consumer protection provisions.
We need to ensure that FERC oversight over the rural electric co-operatives and
public power is reasonable. Except for a few isolated examples, locally owned
utilities typically do not have surplus electricity to sell. These systems do not
represent a significant presence in wholesale markets, and they have been and
will continue to be net purchasers of generation.
Section 201 creates FERC-lite for co-op that transmit electricity. The co-op would
set the transmission rate and the FERC would review it to ensure it satisfies
the comparability standard. The co-op retain control of rate setting and FERC
expands it jurisdiction over co-op transmission rates.
However, Section 702 would negate any notion of FERC-lite authority and should
be removed. It transfers the rate setting function from the co-op to FERC which
destroy Section 201.
I realize that HR 3406 includes provisions for retaining some state-specific re-
quirements in these areas. However, I am concerned whenever we empower a fed-
19
eral agency to make determinations of whether a state program is equivalent to
or not inconsistent with we are opening the door to new intrusions by the federal
government into state authorities. While the current members of the FERC or FTC
may not exercise such authorities to second-guess states, there is no assurance that
future members of those bodies.
I am looking forward to hearing from the witnesses as we continue to work on
the state and co-op issues.
Thanks
PREPARED STATEMENT OF HON. GEORGE RADANOVICH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Chairman, todays hearing is a very important step towards securing Amer-
icas energy future. As this year comes to a close, we are now well into the Twenty-
First century. It is time for us to discard entrenched views and work to secure
ample, reliable and affordable energy for our future.
We are now decades from the 1930s and the 1970s. It is time for a change from
the paradigms of industry currying favors from political regulators, or of a cottage
industry of subsistence energy. Fair markets, consumer choice, and responsible en-
trepreneurship are the path to a vibrant future.
The California Electricity Crisis of the past year is only temporarily dormant. The
underlying problems remain unresolved. Already we see signs of a return to power
plant construction delays, regulatory manipulation, and consumer disregard. We are
kidding ourselves if we believe that a return to monopolies, or to the utopian pro-
posals of the 1970s and 80s will provide reliable and affordable power for an indus-
trious state of 54 million citizens.
There are many positive steps in H.R. 3406 I would like to endorse. First, elec-
tricity markets must be designed to work both in times of overabundance and of
undersupply. Consumers in California have shown their unwillingness to pay any
price for electricity as demonstrated by their conservation efforts. Title I, Section
103 is a necessary action to let the demand side, and consumers, be an active part
of the market.
Second, we learned in California, that PURPA has unintended and disastrous con-
sequences on the prices consumers pay for electricity now and for years to come.
PURPA QF contracts represent approximately one-third of Californias outstanding
electricity debt. PURPA was written for a structure of monopoly electricity providers
and in its present form is no longer workable.
Third, PUHCA did nothing to help consumers in Californias Electricity Crisis.
Any benefits of this arcane law are not evident to consumers, although compliance
with the law does impose additional consumer costs. Since any benefits to con-
sumers from this law no longer exist, let us repeal this law and thus its costs.
There are some aspects of this law, which I would like to see strengthened. I am
concerned that Title I, Section 102 does not mention hydroelectricity and geothermal
sources along with solar, wind and biomass. Small hydroelectric and geothermal
sources are important renewables that are available in the Sierra Nevada Moun-
tains. The Department of Energy has estimated that there are 3,000 MW of incre-
mental hydroelectricity, that can be responsibly developed in California alone. We
must do everything we can to secure the future of this vital resource for our nation.
I am also concerned that the net-metering section carries risks similar to those
we are trying to correct through the repeal of PURPA in that it shifts the costs of
storing energy to the load serving entities. These types of transactions should be
limited to the capacity of a utility to store energy, such as by a pumped hydro
project. No benefit is gained by requiring utilities to build power plants to sit idle
waiting for cloudy or windless days.
Lastly, I believe that the comparison of our transmission system to our national
road system prior to the development of the Interstate Highway System is an appro-
priate one. The Federal Energy Regulatory Commission is clearly struggling with
how to put these various local systems into a unified national framework. This legis-
lation attempts to be of help to that process by addressing issues such as RTOs,
incentive rates, and eminent domain, but it fails to provide a context for those meas-
ures.
It is time to take a chalk to a clean slate. We can be of tremendous help to this
process by providing a bright line criteria to focus the FERC on interstate trans-
mission, and the States on intrastate distribution. A separation criteria of 100 KV
is reasonable and appropriate. We should also require that the Department of En-
ergy provide a layout, by a date certain and with state input, for a 21st Century
National Interstate Transmission Highway of 100 KV lines and above which incor-
20
porates all existing transmission lines in this size range. Only transmission con-
structed in accordance with such a national plan should be the beneficiary of incen-
tive rates and eminent domain.
I encourage all of the parties with interests in this legislation to abandon en-
trenched positions and to consider this legislation in the light of the national inter-
est and to best help consumers have secure and affordable energy for their futures.
PREPARED STATEMENT OF HON. CHIP PICKERING, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MISSISSIPPI
Mr. Chairman, I would like to take this opportunity to bring to your attention as
well as that of the Commissioners concerns I have regarding the new interim, gen-
eration market power test the Commission adopted late last month. As I understand
it, the Commission abandoned the so-called Hub-and-Spoke generation market
power screen, which had been in place for many years and relied upon by market
participants, and adopted a new, definitive generation market power standard called
the Supply Margin Assessment test.
I have some real concerns about FERCs action. First, I find it deeply troubling
that such an important change in policy would be ordered by FERC without any
process for public comment.
Second, the substance of the policy change itself seems ill-advised and wrong. I
dont pretend to understand all the details or the differences between the Hub-and-
Spoke and Supply Margin Assessment methods. And as you know, this Sub-
committee has spent a lot of time the past few years trying to understand, address,
and respond to legitimate market power concerns. We all want to avoid another
California-style mess. We all share the goal of having competitive wholesale power
markets. Addressing legitimate market power concerns is an important part of this
process. But I must tell you all that there appear to be very serious problems with
the new interim, generation market power test you have adopted.
For example, we have heard that the new test will discourage new generation in-
vestment and potentially expose other regions of the country to California-like de-
pendence on short-term markets and power purchases. Additionally, we have heard
that the new, interim test may effectively deny most, if not all, of the nations inves-
tor-owned utilities that still own generation plants market-based rates in their home
states. This not only appears unfair, but also may create a perverse incentive
against longer term investments as utilities and major merchant plant developers
try to avoid being or becoming a pivotal supplier and flunking the new test in cer-
tain areas. This, combined with the blanket refund obligations you all have pro-
posed, may actually end up increasing consumer rates, create tremendous regu-
latory and financial uncertainty, and lead to an unhealthy reliance on shorter term
and riskier transactions. I thought we had been down this road before and were
hoping to take a better-planned route to competitive wholesale markets.
We all want to avoid another California debacle. But in view of all the legitimate
problems that have been raised about this interim, market power test, and since you
have already announced that you will be starting a notice and comment rulemaking
proceeding to address and adopt a longer-term generation market power method
which I encourageI would ask that the Commission not implement or enforce in
any way this new interim method until all of its potential effects are better under-
stood. This can only be done after the Commission receives more input from all in-
terested partiesincluding state Commissionersin a notice and comment rule-
making proceeding. In my view, reviewing the rehearing petitions, while important,
does not substitute for a full-blown rulemaking proceeding.
While I understand the Commission delayed full implementation of the new test
on December 20, 2001, I am still concerned about the thought process leading up
to the original order. Why did the Commission risk disrupting what appear to be
efficiently operating wholesale electricity markets in most parts of the country to
implement a potentially costly and problematic interim testespecially as we head
into the winter heating season? It doesnt appear that the Commission even consid-
ered that in many parts of the country, electricity prices have been decreasingin
some areas significantlyas new merchant plants come on line. Simply put, I dont
see a crisis warranting such a dramatic intervention in the market that would jus-
tify such a major departure from long-standing FERC policy.
We all share Chairman Woods and Commissioner Brownells view that the long-
term success of the market model to address customers needs depends upon suffi-
cient infrastructure and balanced market rules. However, the new, interim genera-
tion market power test appears to be inconsistent with these important goals. If you
all want utilities to join Regional Transmission Organizationsa goal I sharethis
21
approach seems like an awfully indirect, punitive, and potentially dangerous way
to get there. I would ask you all to take a step back and fully consider the impact
of the new test and hear from all concerned before it has unintended and bad con-
sequences for consumers and our nations electricity markets. I would hope you
would consider these concerns in a notice and comment rulemaking proceeding and
not just review the pending rehearing requests.
Mr. BARTON. The Chair now wishes to welcome its distinguished
first panel. We have the distinguished Deputy Secretary of Energy,
Mr. Blake, from the Department of Energy; we have the four FERC
commissioners, including their distinguished Chairman, Mr. Wood,
and we have the chairman of the Tennessee Valley Authority, Mr.
McCullough.
Ladies and gentlemen, your statements are in the record in their
entirety. We are going to start with Deputy Secretary Blake. Then
we will go to Chairman Wood, and I would assume each of the
other commissioners have a statement you wish to make; is that
correct? Okay. And then we will go to Mr. McCullough.
Welcome, Mr. Blake.
STATEMENTS OF HON. FRANCIS BLAKE, DEPUTY SECRETARY,

U.S. DEPARTMENT OF ENERGY; HON. PAT WOOD III, CHAIR-
MAN, FEDERAL ENERGY REGULATORY COMMISSION; HON.
LINDA K. BREATHITT, COMMISSIONER, FEDERAL ENERGY
REGULATORY COMMISSION; HON. NORA MEAD BROWNELL,
COMMISSIONER, FEDERAL ENERGY REGULATORY COMMIS-
SION; HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION; AND GLENN L.
MCCULLOUGH, JR., CHAIRMAN, TENNESSEE VALLEY AU-
THORITY
Mr. BLAKE. Thank you, Mr. Chairman and members of the com-
mittee, and thank you for the opportunity to come before you today.
I will just briefly summarize my testimony.
The administration strongly believes that we need to continue
the work of establishing open, transparent and competitive elec-
tricity wholesale markets. This will benefit consumers, through in-
creased supply and lower prices, and it will benefit the reliability
and security of our transmission infrastructure, an infrastructure
that is essential to our economy.
The Presidents national energy policy calls for comprehensive
electricity legislation. It respects the role of the States and focuses
on the regulation of wholesale power markets and transmission in
interstation commerce. We welcome this committees attention to
the issues and applaud the chairmans leadership on this matter.
As outlined in my testimony, we agree with most of the goals of
the proposed legislation, and we look forward to working with the
committee on those areas in the specifics where we might have
some disagreement.
let me close by emphasizing what we view as the importance of
following through on our nation commitment to open and trans-
parent markets. We need to continue on a clear path forward to as-
sure that affordable capital is available for the infrastructure needs
of our country. Thank you very much.
[The prepared statement of Hon. Francis Blake follows:]
22
PREPARED STATEMENT OF HON. FRANCIS BLAKE, DEPUTY SECRETARY, UNITED
STATES DEPARTMENT OF ENERGY
Mr. Chairman and Members of the Subcommittee, I welcome the opportunity to
testify before you today on Chairman Bartons bill, HR 3406, the Electric Supply
and Transmission Act.
The Administration believes that electricity legislationdone rightwill make
wholesale power markets more competitive, strengthen the transmission grid, in-
crease electricity supply, lower prices, protect consumers, and improve reliability.
The Presidents National Energy Policy calls for comprehensive electricity legislation
that respects the role of the States and focuses on the regulation of wholesale power
markets and transmission in interstate commerce.
When the Federal Power Act was written in 1935 there was virtually no inter-
state commerce in electricity, there was no interstate transmission grid, electricity
markets were local, power plants were built near consumers, and electricity genera-
tion was perceived to be a natural monopoly.
The evolution of the electricity industry today presents a different picture. The
transmission grid is both interstate and international, electricity markets encom-
pass entire regions, almost all wholesale electricity sales are in interstate commerce,
and the natural monopoly in generation has long since been disproved. The elec-
tricity industry has been swept by dramatic changes for years, investment in new
transmission and generation has lagged as a result, and legislation can significantly
reduce this uncertainty and strengthen the U.S. electricity industry. The time has
come to modernize federal electricity laws to recognize these changes.
In order to address these changes in the electricity market, the Presidents Na-
tional Energy Policy recommends several proposals to encourage modernization of
electricity law and foster investment in both generation and transmission. First, the
Department of Energy has been tasked with conducting an analysis of the nations
transmission grids in order to determine where we need more transmission and bet-
ter interconnectivity and instructs DOE to consider the benefits of a national grid.
A Department of Energy report on these issues is shortly forthcoming. Second, the
Policy encourages FERC to develop a rate structure that would encourage the con-
struction of additional transmission. Finally, the Policy instructs DOE to develop
legislation that would provide the federal government with transmission siting au-
thority to address situations that might arise where failure to act by a state or local
government causes major constraint in an areas transmission needs. The Depart-
ment of Energy has been working with both Congress and States to develop siting
authority language that respects the role of the States as well as regional needs.
The recent electricity crisis in California and the West was a dramatic demonstra-
tion of the problems that exist under the status quoproblems that Congress can
and should address. The time has come for Congress to reduce the tremendous regu-
latory uncertainty facing the electricity industry, and modernize federal electricity
laws in order to make wholesale power markets more competitive, strengthen the
transmission grid, increase electricity supply, lower prices, protect consumers, and
improve reliability. We believe that Chairman Bartons proposed legislation goes a
long way toward accomplishing these goals, and look forward to working with the
Committee on this important bill.
As to the specifics of H.R. 3406:
Title I
The Administration agrees with the policy goals of sections 101, 102 and 103.
The Administration supports the repeal of PUHCA, as has every Administration
since 1984.
The Administration supports prospective repeal of the mandatory purchase obliga-
tion under PURPA and believes the legislative language should be amended to
eliminate the ownership limits on PURPA qualifying facilities.
The Administration supports section 142 because the Administration believes that
NRC antitrust review is redundant and unnecessary and should be prospec-
tively repealed.
Title II
The Administration supports the policy goal of section 201 and looks forward to
working with the Committee to agree on final specific language.
With regard to section 202, the Administration believes RTOs have great potential
to improve competition, secure reliability and ensure sensible regional coordina-
tion. To the degree RTOs serve those purposes, we support them.
23
Title III
With regard to section 301, the Administration believes this section is an improve-
ment over the reliability provisions of legislation approved by the Subcommittee
two years ago and approved by the Senate last year.
Title IV
The Administration agrees that FERC transmission-pricing policies should en-
courage increased investment in new transmission. The Administration there-
fore supports the legislative proposal in section 401 to direct FERC to develop
a performance-based regulatory framework for transmission pricing.
Section 402 grants FERC limited authority to issue permits to construct or modify
transmission facilities under certain circumstances. The Administration sup-
ports this proposal.
Title V
The Administration generally supports the language in Title V and looks forward
to working with the Committee to agree on final specific language.
Title VI
The Administration generally agrees with the consumer protection provisions in
Title VI and looks forward to working with the Committee to agree on final spe-
cific language.
Title VII
The Administration opposes section 702, which expands FERCs refund authority.
The President has asked for comprehensive electricity legislation which will re-
duce regulatory uncertainty, make wholesale power markets more competitive,
strengthen Americas transmission grid, increase electricity supply, lower prices,
and improve reliability. We believe that this legislation is a good start on these prin-
ciples and look forward to working with Congress to enact them.
At this time I would be happy to answer any questions that the Committee may
have for me.
Mr. BARTON. I think thats the shortest administration statement
before my subcommittee in the 3 years I have chaired it. So I ap-
preciate the support.
We will now go to the Chairman of the FERC, Mr. Pat Wood of
Texas.
STATEMENT OF HON. PAT WOOD III
Mr. WOOD. Thank you, Chairman Barton and members. When I
joined the Federal Energy Regulatory Commission earlier this sum-
mer, I did so with a sense of urgency. In the aftermath of the tor-
tuous experience in the western markets and the impacts that it
had on customer faith in the concept of competition serving cus-
tomers well, followed shortly after my ascension to the chairman-
ship with the bombing of the World Trade Center and the Pen-
tagon and the implications upon what we redefined energy security
to mean and now in the aftermath of Enron and the, I think, unfair
association of its unique issues with other players in the energy
market, it is very clear to me from talking to investors, from talk-
ing to customers and everybody in between that we need to get this
industry clarified, and we need to make sure that the ground rules
for investment and for customers and for new participants are
nailed down. So I think the sense of urgency that I certainly heard
from a number of the committee members this morning is one that
I personally share at the Commission.
It is not a theory that we are talking about; it is real dollars.
With Congress and FERC, back in the mid-1980s, the deregulation
of the other great network energy industry, natural gas, began. It
took about 7 years compared to the 9 years which we are in now,
in electricity. But since that effort was largely wrapped-up in 1992,
24
tens of billions, with a b, of dollars have stayed in customer pock-

ets because of the successful one-two punch of introducing competi-
tion and then deregulating, getting government out of the way, a
significant sector of the natural gas industry. I think that is not
theory; that is a very real model that has got a lot of application
to what the committee has before it in the chairmans package
today.
I think that package does a lot of things. While FERC has moved
forward in the areas where we do have authority today, we cer-
tainly think there are a number of areas where our authority is ei-
ther not clear or is nonexistent that are very important to com-
pleting the energy infrastructure and competition-certainty picture
that investors and customers need to have faith that their energy
markets are working well on their behalf.
I think I will list just a few of those. Certainly, the steps that
we are taking, I will be glad to discuss them along the lines that
I believe Chairman Barton laid out in his statement. But the issues
where we have no ability, such as on the issues of PUHCA,
PURPA, demand-side managementthe clarification about the
issues thereand the great future of the electric industry for
small-scale distributed generation. There is a provision there that
I think is very important for setting some clear investment and
cost recovery standards for DG. The importance of open access is
not just a voluntary thing. As the court affirmed yesterday, we
have the right to lay out on a voluntary basis. With that, Chair-
man Bartons bill actually says it is something that everybody
should do; that also includes Federal power agencies, which up to
now have not been as directly involved in the efforts to create a
seamless national power grid from coast to coast.
Enforcement of liability standards is important. This bill ad-
dresses that as well, which we cannot do through the current stat-
ute. The backstop of transmission expansions, while I share the
opinions of many that this may be a solution looking for a problem,
it would be nice if this happens in 10-year cycles to ensure that
good transmission concepts do not get forgotten or overlooked or
nixed by a State that may not want to have the region improved.
And, finally, certainly, the customer protections, which do not in-
volve my agency, but the market oversight tools that are strength-
ened and expanded at the end of the chairmans mark are very im-
portant provisions that I think will enhance the Commissions abil-
ity to oversee these markets. I think we are doing quite a bit on
that effort. I would like to report on that later, but I think the
sense of urgency also applies to todays schedule, so I will conclude
now, Mr. Chairman, and look forward to any questions from the
members.
[The prepared statement of Hon. Pat Wood III follows:]
PREPARED STATEMENT OF HON. PAT WOOD, III, CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
I. INTRODUCTION
Mr. Chairman and Members of the Subcommittee: Good afternoon. Thank you for
the opportunity to speak today on the Chairmans proposed legislation, H.R. 3406,
to restructure the electric utility industry to full, effective wholesale competition.
This industry has changed substantially in the years since Congress enacted the En-
ergy Policy Act of 1992, moving closer to the Congressional goal of a competitive
25
wholesale electricity market. However, the transition is not complete. Infrastructure
investment suffers from the uncertainty of this long transition. Reliability is being
tested and customers are being deprived of the financial savings and other benefits
of a competitive marketplace. It is time to finish the job.
Today, I will describe briefly the significant actions taken by the Commission in
recent months to do just that, and the efforts planned by the Commission in the
future. I will identify those areas in which legislation could facilitate the Commis-
sions efforts. Finally, I will discuss other significant aspects of the Chairmans pro-
posed legislation and suggest certain modifications to the legislation.
My key point today is that successful completion of the industrys transition re-
quires a balancing of short-term and long-term considerations. In the short term,
we must take steps to ensure that the transmission grid is operated more efficiently
and fairly, and is expanded when appropriate. We must eliminate unnecessary bar-
riers to entry of new generation, big or small. We must facilitate the development
of more market-based demand reduction programs. And we must take steps to en-
sure that the type of market problems experienced in California do not recur there
or elsewhere by establishing clear, fair, balanced market rules. Taking these steps
in the short term will give investors the certainty they need to make long-term com-
mitments to new electrical infrastructure. Over the long term, this commitment to
sound infrastructure and sound market rules ultimately will allow us to achieve the
kind of competitive wholesale markets envisioned by the Energy Policy Actwith
choices dictated by the market, not by government.
Some argue that the short-term steps envisioned by the Commission will chill in-
frastructure investments, not encourage them. I disagree. People will not invest in
generation where they believe transmission owners will operate the grid unfairly,
delay interconnections of new generation or fail to expand the grid as needed. Simi-
larly, markets characterized by a pattern of extreme price turmoil and the risk of
further governmental restrictions will not provide the certainty needed by investors.
The short-term steps described below will encourage the future stability of the mar-
kets, reduce or eliminate the risk of crisis-driven governmental interventions and,
thus, give investors the confidence to commit billions of dollars to building the infra-
structure our nation needs.
II. REGIONAL TRANSMISSION ORGANIZATIONS (RTOS)
Electric power markets are regional in nature. For that reason, the Commission
has been promoting the formation and development of a small number of RTOs.
These institutions, once formed, will assure reliable minute-by-minute grid oper-
ations, optimize fair use of the electric highway by all users, plan for the future
transmission needs of the region and help long-term supply stay ahead of long-term
demand.
Two years ago, the Commission decided to move forward with RTO formation on
a voluntary basis. Although that has been a more tortuous path than originally in-
tended, it is drawing to a close with utilities in all regions of the country coalescing
around organizations of appropriate scope, governance and configuration. But if any
party challenges this progress in courts, then Congress should make clear its intent
that these organizations are its preference. This will save the industry years in the
courts, ensure customers get the billions of dollars of savings that a competitive
power market can deliver during that time, and most importantly, rebuild to secure
and reliable levels a bedrock industry that has suffered inadequate investment in
the past decade.
Recently, the Commission clarified its policies and plans on RTOs. In an order
issued last month, the Commission indicated that it intends to complete the RTO
effort on two parallel tracks. The first track will be to resolve issues on scope and
governance in pending cases; the second track will be a rulemaking to standardize
the market design for public utilities, to be implemented by RTOs. The Commission
has also begun forming state-federal regional panels as a structured forum for con-
structive dialogue with state commissions on RTO development. We hope to expand
these panels in the future to discuss other joint concerns. The Commission is updat-
ing cost-benefit studies on RTOs (with input on the analysis from a diverse panel
of state commissioners) and will establish in future orders the timelines for con-
tinuing RTO progress in each region. We expect to address the RTO structure in
the large Midwestern region of the country at our December meeting.
In establishing the characteristics and functions of RTOs and the procedures for
obtaining Commission approval of an RTO, the Commission relies on sections 205
and 206 of the Federal Power Act. These sections are the Commissions fundamental
authority for ensuring that the rates, terms and conditions of transmission in inter-
state commerce by public utilities are just, reasonable and not unduly discrimina-
26
tory or preferential. In addition, the Commission has relied on its authority under
section 203 of the Federal Power Act to review proposed transfers of operational
control over jurisdictional transmission facilities. While some may question the
Commissions as-yet-unexercised authority to require the formation of RTOs, there
is no legitimate debate about the Commissions authority to oversee voluntarily-
formed RTOs.
I strongly support the formation of RTOs. RTOs will provide significant benefits
to electric utility customers across our Nation. I believe the best legislative approach
at this time would be for Congress to adopt a provision permitting the Commission
to require RTOs where it finds such RTOs to be in the public interest. This simple
step would avoid problems that could arise if Congress codifies extensive and cum-
bersome procedures for formation of RTOs and detailed standards for those RTOs;
it also would allow the Commission to adapt the RTO procedures and standards ap-
propriately over time, as circumstances change.
Section 202 of the Chairmans proposed legislation would codify more prescriptive
procedures. Section 202 would require all transmitting utilities (a term that in-
cludes both investor-owned utilities and public power/electric power cooperative util-
ities) to participate in an RTO. A utility not in a Commission-approved RTO upon
enactment of the bill must submit an application to form or join an RTO. If the
Commission finds the application does not meet the standards specified in the bill,
the Commission, in consultation with affected State authorities, must propose modi-
fications. The Commission cannot mandate formation of, or participation in, an RTO
except under these provisions. If an applicant asks, the Commission must hold an
evidentiary hearing on the proposed modifications. Subsequently, the utility has a
right to seek appellate review, during which time the Commissions order is stayed.
If the court finds the Commissions decision is supported by a preponderance of the
evidence, the court must uphold the Commissions decision. Otherwise, the Commis-
sion must order the utility to participate in its proposed RTO without modification.
If Congress decides to proceed with the more elaborate process laid out in Section
202, I have specific concerns about aspects of the provision. First, I do not support
giving a single RTO applicant the unilateral right to require an evidentiary (trial-
type) hearing instead of paper hearings. While evidentiary hearings may be appro-
priate in certain cases, most cases can be fairly resolved much more quickly based
on paper submissions and non-trial type procedures. Further, because the provision
requires a stay of a Commission RTO order pending court review, and a Commis-
sion order likely would address one application filed on behalf of all the participants
in the region, this provision could allow a single applicant to stall the creation of
an RTO and an effective wholesale market for many years, raising costs for other
applicants and all regional electricity consumers. Formation of workable wholesale
markets will be more likely and swift without these provisions.
Second, I do not support the requirement for a preponderance of the evidence
instead of substantial evidence supporting the Commissions decisions. The sub-
stantial evidence test has been the basis for court review under the Federal Power
Act since 1935, and I see no reason why a different standard is now needed for this
one category of cases.
Third, I see no reason for the provision resembling baseball-type arbitration,
under which the Commission either must prevail in court or accept without modi-
fication the utilitys proposal. Judicial review of Commission decisions sometimes
yields a remand to the Commission for a fuller explanation or more fact-finding, and
I see no reason to preclude that option here. In general, having RTO formation de-
pendent upon only transmission-owning applicants, rather than all wholesale mar-
ket players, leads to a less balanced and robust marketplace. A successful wholesale
market model must have strong stakeholder participation and oversight at its core.
Section 202 also specifies the standards for RTOs. These standards are drawn
partly from the Commissions Order No. 2000. While it might be appropriate to cod-
ify some general standards (such as the basic independence requirement), other
standards and the details of implemention are not appropriate to legislate. As mar-
ket circumstances and structures change, and as the Commission gains experience
with market behavior, the Commission needs the flexibility to adapt its rules over
time to ensure that markets remain robust and customers interests are safe-
guarded; a rigid, legislative codification of standards could preclude this flexibility.
If Congress does codify such standards, certain elements of section 202s stand-
ards raise other concerns. For example, the bill requires a proposed RTO to have
sufficient generation within the RTOs boundaries to serve the load within such
boundaries. While I agree that this is desirable, exceptions may be appropriate in
certain circumstances, and section 202 should allow exceptions deemed appropriate
by the Commission.
27
The bill allows each public utility in an RTO to file original or amended rates
concerning transmission service on such utilitys facilities. This is contrary to the
Commissions requirement in Order No. 2000 that the RTO have the exclusive right
to make rate filings related to the rates, terms and conditions of transmission serv-
ices it provides to transmission customers in the region. While the Commission
found that transmission owners have the right to file to recover from the RTO their
own revenue requirements, it also found that it would be contrary to the basic RTO
independence requirement if transmission owners could control the RTOs rate fil-
ings.
I note that section 3 of the bill would define a market participant as any entity
that generates, sells, or aggregates electric power (other than State-ordered transi-
tion or default service) that is transmitted on the transmission system operated by
a regional transmission organization. As above, I do not believe Congress should
legislate a definition of market participant, since such a definition may need to
be changed over time as we gain experience with market behavior and new types
of market institutions and activities (for instance, it excludes energy service compa-
nies that could aggregate demand and negawatts and offer price-responsive de-
mand opportunities in wholesale and retail electric markets). Further, with respect
to the specific definition in section 3, I disagree with the provision on State-ordered
transition or default service. This provision appears to assume that, unlike other
market participants, utilities providing such services are economically indifferent to
the grids operation because their profits or growth potential will not depend on the
cost of their power supplies. Depending on the terms under which they provide this
service, however, utilities may have the same economic incentive as other market
participants to benefit from grid operations that provide them preferential access to
low cost supplies.
If Congress does legislate a definition, a better approach to defining market par-
ticipant is the definition adopted by the Commission in Order No. 2000, which in-
cludes:
(i) Any entity that, either directly or through an affiliate, sells or brokers elec-
tric energy, or provides ancillary services to the Regional Transmission Organi-
zation, unless the Commission finds that the entity does not have economic or
commercial interests that would be significantly affected by the Regional Trans-
mission Organizations actions or decisions; and
(ii) Any other entity that the Commission finds has economic or commercial
interests that would be significantly affected by the Regional Transmission Or-
ganizations actions or decisions.
18 CFR 35.34 (b)(2) (2001). This approach is more flexible than the bills assumption
that providers of State-ordered transition or default service always lack economic or
commercial interests that would be significantly affected by the RTOs actions or de-
cisions.
Finally, three other provisions raise concerns. First, the legislation would require
the Commission to accept a cost/benefit analysis submitted by an applicant to sup-
port its proposed scope and configuration, unless the Commission finds the scope
and configuration does not meet the statutory requirements by a preponderance of
the evidence. Cost-benefit analyses are easily susceptible to manipulation of as-
sumptions and data to achieve a desired result, so any analysis should be tested
and verified rather than automatically accepted. Second, the standard for the Com-
missions findings should be substantial evidence, not a preponderance. Third, the
legislation would preclude the Commission from requiring any change to the govern-
ance or scope of an RTO finally approved without condition before the laws enact-
ment. This provision would prevent the Commission from responding to changed cir-
cumstances warranting modifications in the RTOs governance or scope.
III. INTERCONNECTIONS
The current lack of standardized interconnection agreements and procedures

means that every new generator can be forced to expend time and money negoti-
ating the terms and conditions of an interconnection arrangement, before it can
have any certainty about its ability to deliver power to the grid. This uncertainty
is a significant barrier to entry for new generation.
To remedy this problem, on October 25, 2001, the Commission issued an Advance
Notice of Proposed Rulemaking (ANOPR) requesting comments on a standardized
generator interconnection agreement and procedures. The ANOPR strongly encour-
aged interested parties to pursue consensus on the issues and presented a model
that was used successfully in Texas as a strawman to facilitate the process. Parties
must file this Friday a document describing the consensus views and any remaining
disagreements; any additional comments are due by December 21, 2001. I under-
28
stand that industry is reaching consensus on many issues in the ANOPR process
but that they may request a brief extension of time to complete their negotiations.
I assure you that I will be receptive to a brief extension if it is evident that progress
is being acheived toward a consensual resolution of these issues.
The Commission expects to use the outcome of the ANOPR as the starting point
for a rulemaking to standardize interconnection protocols. This rulemaking will clar-
ify and simplify the procedures for interconnecting new generation, thus promoting
competition and benefitting customers.
The Commission has held that interconnection is a component of transmission
service. Thus, the Commissions authority to standardize interconnection protocols
derives from sections 205 and 206 of the Federal Power Act, under which the Com-
mission oversees the rates, terms and conditions of jurisdictional transmission serv-
ice.
Section 101 of the Chairmans proposed legislation establishes requirements for
interconnections with distribution or transmission facilities. Section 101 addresses
the generators right to interconnect and its duty to pay interconnection costs, the
availability of backup power and the rates, terms and conditions for such power.
The Commission is required to promulgate the technical standards for interconnec-
tions. The Commission is also required to establish the process and procedures for
interconnection with transmission facilities. A transmitting utility or regional trans-
mission organization is exempted from the Commission-established process and pro-
cedures upon showing that substantially comparable interconnection procedures
and agreements have previously been filed with and approved by the Commission
for interconnection with that entity. But this exemption provision would nullify the
benefits of standardization by forcing the Commission and utilities to litigate over
which substantially comparable non-standard provisions are acceptable and ex-
empt from the standard, and keep non-standard agreements in place for years.
As stated above, standardization of rules and procedures for interconnecting all
new generation and expansions of existing generation is a good policy, both for tra-
ditional power plants and for small-scale distributed generation. This is a high pri-
ority goal for the Commission. Standardization will help minimize the costs and bar-
riers to entry for new and expanded generation, which is critical to a robust com-
petitive marketplace and the realization of lower electricity costs for end users.
As written, Section 101 may be overly prescriptive and impede the Commissions
ability to adapt its approach as the industry changes over time. A more general ap-
proach may be preferable. If the current approach is retained, I suggest another
change in Section 101, pertaining to the right to backup power for generators inter-
connecting with distribution facilities unless the local distribution utility allows
open access to its facilities. In this context, open access is defined as access that
is not unduly discriminatory or preferential. However, the Commission found in es-
tablishing wholesale open access to public utilities transmission facilities that the
lack of a published tariff of rates, terms and conditions was a significant obstacle
to service. The Commission required public utilities to provide open access trans-
mission service by tariff. Accordingly, I believe a local distribution utility must offer
open access service by tariff before it can be relieved of its duty to provide backup
power.
IV. TEST FOR GENERATION MARKET POWER
Since beginning to grant market-based rates (rate deregulation) to public utilities

in the 1980s, the Commission primarily focused on the applicant and employed a
hub-and-spoke analysis to determine whether an individual entity and its affili-
ates have generation market power. In a hub-and-spoke analysis the applicant com-
putes its market share of generation in a particular market. While the Commission
did not use a bright line test, it looked to a benchmark for generation market
power of whether a seller had a market share of 20 percent or less in each market.
In public deliberations shortly after I joined the Commission this summer, which
were informed in part by our experiences in California, my colleagues and I ques-
tioned the usefulness of the hub-and-spoke test as a tool to identify the potential
for the exercise of harmful market power. After reviewing the issue over the sum-
mer, the Commission instructed our staff at an Open Meeting on September 26th
to refine the hub-and-spoke test on an interim basis for future applications and for
current certificate holders three-year updates, while contemplating a rulemaking to
address the issue on a more permanent basis.
The revised test, the Supply Margin Assessment (SMA), improves upon the hub-
and-spoke in two critical ways. First, unlike the hub-and-spoke, the SMA excludes
from the analysis of the relevant market those sellers who are physically precluded
from participating in that market by transmission constraints. Second, instead of
29
deriving an overall market share, the SMA determines whether any part of a sellers
capacity is pivotal, i.e., must be used to meet the markets peak demand. For ex-
ample, if peak demand in a market is 100 megawatts, total capacity in the market
(including the applicants) is 120 megawatts and the applicant owns 60 of the 120
megawatts, the sellers capacity is pivotal because at least 40 megawatts of the sell-
ers capacity is needed to meet peak demand. By contrast, a seller with only 15
megawatts would not be pivotal because peak demand in the market could be met
fully by other suppliers.
A company that fails the SMA screen is subject to mitigation to ensure that the
company does not exercise market power by withholding its capacity from the mar-
ket. Under this mitigation, the company must offer for sale, a day in advance, any
short-term capacity which is not already committed for sale or use by the company.
The price for any such sales is based on a split-the-savings approach which divides
the economic benefits of the transaction equally between the seller and buyer. This
test is administratively preferable to the more intensive cost-of-service based cal-
culation traditionally used, for example, to set retail rates in regulated states. The
company must also post offers to sell long-term energy products (in addition to the
daily products noted above).
This mitigation is carefully tailored to apply only to the extent necessary. For ex-
ample, mitigation applies only in the specific market where the utility has market
power, and the utility (and its affiliates) are still allowed to sell at market-based
rates in any areas where they do not possess market power. The mitigation applies
only to capacity that is not committed a day in advance (spot sales), and does not
affect a utilitys authorization to sell its capacity under long-term contracts. Finally,
the SMA does not apply to sales in an RTO or an Independent System Operator
(ISO) with Commission-approved market monitoring and mitigation.
The Commission soon will initiate a generic proceeding to consider long-term
changes to its analysis for generation market power. In the meantime, the SMA and
its carefully-crafted mitigation are a substantial improvement on the prior ap-
proach, while continuing to allow sellers to compete freely in markets where they
lack generation market power. I would note that the interim SMA market power
screen is subject to rehearing, and the Commission will consider carefully any re-
quests for rehearing.
Apart from these efforts, the Commission recently proposed a new condition on
its authorization of market-based rates for electricity producers. Under this pro-
posal, a seller would be subject to refunds or other appropriate remedies if it en-
gages in anti-competitive behavior or exercises market power. This condition would
be triggered only when the seller engages in inappropriate conduct, not when mar-
ket problems are caused by poor market rules or other generic dysfunctions. The
Commission adopted a similar condition to help address the market problems in
California and the Western United States, and is now proposing to extend the condi-
tion to public utilities elsewhere. The Commission is receiving public comments on
this proposal and will fully consider the comments before making a final decision.
V. RELIABILITY
Section 301 of the Chairmans proposed legislation provides for Commission cer-
tification of an electric reliability organization (ERO) to develop and enforce reli-
ability standards applicable to all users, owners and operators of the bulk power
system. The bill specifies the criteria for the ERO. The ERO would be required to
file its proposed reliability standards with the Commission, and the Commission
would need to act on those proposals within specified time periods. The ERO and
the Commission would have to rebuttably presume that a proposal from a regional
entity for a reliability standard applicable on an interconnection-wide basis is just,
reasonable, not unduly discriminatory or preferential and in the public interest. The
ERO would have authority to enforce its standards, subject to Commission review.
Section 301s approach to reliability is a step in the right direction. Although I
have not seen problems with the current voluntary process, parties inform me that
federal legislation is needed to ensure the enforceability of the reliability standards.
While some technical clarifications or modifications to the proposed language might
be useful, as a general matter section 301 takes a reasonable and efficient approach
to this problem.
VI. TRANSMISSION JURISDICTION
A. Open Access
Separate but equal transmission is inherently unequal. Transmission of electric
power is interstate commerce and should be fairly recognized as such. And all users
of transmission service should be treated equally, provided they pay for it. One need
30
look no further than Chairman Bartons home state to observe the positive impact
that having clear rules from a single regulator has had on needed investment and
expansion of the grid.
Section 201 of the Chairmans proposed legislation would allow the Commission
to require all public utilities and transmitting utilities to offer open access trans-
mission services. In recent years, open access transmission services by public utili-
ties have increased competition in wholesale power markets significantly. Extending
this requirement to the large portion of the grid owned or operated by transmitting
utilities that are not public utilities will further increase competition. I believe this
can be done in a manner that respects the historic independence of certain public
power utilities while ensuring that a consistent approach is applied to all users of
the interstate grid, to further wholesale electric competition and benefit all elec-
tricity customers.
I support Section 201 but suggest minor changes. First, for reasons explained
above, section 201 should be clarified to provide that the Commission can require
open access transmission services by tariff, and can require such tariffs to be on file
with the Commission so that potential transmission customers have available for
public inspection, in a centralized place (the Commission), all open access services
being offered and the rates, terms and conditions of such services.
Second, section 201 would require the Commission to ensure that the rates
charged for open access services by a transmitting utility other than a public utility
are comparable to the rates the utility charges itself. The Commission would be
given authority to review and remand the rates for revision where necessary, but
would not have the authority to modify the rates directly. The Commission could
be given the authority to modify the rates where necessary, to prevent any delay
in the establishment of rates in compliance with section 201.
B. Stranded Costs
Section 201 also would require the Commission to authorize recovery of wholesale
stranded costs caused by a municipalization, and specifies precisely how the Com-
mission should determine the reasonable expectation period for purposes of calcu-
lating the stranded costs. I am concerned about the latter provision, and believe
that the calculation of stranded costs should be left to the Commissions discretion
based on all relevant circumstances in a particular case. The Federal Power Act
does not prescribe how to calculate stranded costs except in requiring that rates
must be just, reasonable and not unduly discriminatory or preferential. This statu-
tory approach should not be changed.
C. Transmission Siting
Section 402 would allow the Commission to authorize construction or modification
of transmission facilities if it makes each of three findings: (1) the relevant State
lacks authority to approve the action, has withheld or delayed approval for more
than a year or has conditioned its approval such that the action is economically in-
feasible; (2) the facilities being authorized will be used for transmission of electric
energy in interstate commerce; and (3) the action is consistent with the public inter-
est, as proposed or conditioned.
A FERC backstop such as this may well be the best decision, but there are others
that could work. Since these siting issues are largely regional, the RTO could be the
backstop instead of FERC. This keeps the relevant determinations of need, environ-
mental issues and landowner concerns closer to the affected citizens. Or, it may be
enough to simply require states to make final decisions (pro or con) within a fixed
time-frame. Some states specifically require that a transmission line approval by
that state be shown to provide direct benefits to the citizens of that state. This sort
of provision may make it difficult for a state to approve routing of a line that has
significant regional benefits but not specific local benefits.
VII. OTHER ISSUES
A. Investigations, Refunds and Penalties

Section 702 of the proposed bill expands section 206 of the Federal Power Act to
allow the Commission to order refunds not only by public utilities but also by other
entities that provide transmission service or power to a public utility. Section 703
expands the criminal penalties authorized under section 316 of the Federal Power
Act. Section 703 also broadens section 316A of the Federal Power Act so that civil
penalties are authorized for violations of any provision under Part II of the Federal
Power Act, instead of only sections 211, 212, 213 or 214.
These provisions are helpful changes to the Federal Power Act. The recent prob-
lems in wholesale markets in California and the Western United States dem-
onstrated the need for such changes.
31
B. PUHCA
Sections 111-125 of the Chairmans proposed legislation repeal the Public Utility
Holding Company Act of 1935 (PUHCA) and replace it with increased access by the
Commission and state regulators to certain books and records. This is appropriate.
PUHCA was enacted primarily to undo harms caused by certain holding company
structures that no longer exist. In the 65 years since PUHCA was enacted, utility
regulation has increased substantially under the Federal Power Act (including over-
sight of corporate restructurings such as electric utility mergers, discussed below),
federal securities laws and state laws, all of which ensure that customers are fully
protected.
C. PURPA
Sections 131-134 of the Chairmans proposed legislation repeal prospectively the
mandatory purchase obligation in the Public Utility Regulatory Policies Act of 1978
(PURPA). As indicated in the bills proposed findings, PURPAs forced sale re-
quirement is no longer necessary to promote competition, in light of the availability
of open access transmission, and more often serves to distort competitive outcomes.
Thus, I agree that Congress should repeal PURPA but grandfather existing
PURPA contracts. To provide a smoother transition for parties which made invest-
ments under the expectations created by PURPA, it may be appropriate to limit its
repeal to those states where all generation entities have the ability to sell their out-
put to the widest possible range of customers.
D. Mergers
Section 141 would repeal section 203 of the Federal Power Act, the authority
under which the Commission reviews proposed mergers and other dispositions of
public utility facilities. This provision may not be in the public interest. The Com-
mission deals with the electric utility industry on a daily basis and much more
closely than the federal antitrust agencies. Thus, the Commission is better able to
identify and remedy any harmful effects of mergers and other dispositions. Our ef-
forts do not duplicate those actually being performed today by other merger review-
ing agencies. The Commission has used its section 203 authority as intended by
Congress to ensure that mergers and other dispositions are consistent with the pub-
lic interest. Also, in recent years, the Commission has acted quickly on merger ap-
plications, almost always within 90 days after receiving public comments on a pro-
posed merger.
In addition, it may be a good idea to clarify the Commissions authority to review
mergers involving only generation facilities and mergers of holding companies with
electric utility subsidiaries. The increasing amount of competition in power genera-
tion markets makes this more than an academic question. But, to be fair, there are
other, less blunt tools that the Commission has to address generation market power.
VIII. CONCLUSION
The electric utility industry has come far since the enactment of the 1992 Energy
Policy Act. The Commission is moving ahead aggressively to achieve that legisla-
tions vision of fully competitive wholesale markets. Additional legislation will help
us get there faster. I support the Commission-related provisions of Chairman Bar-
tons proposed legislation, with the modifications described above. This legislation
will help all electric customers realize greater benefits from wholesale competition.
Mr. BARTON. Thank you, Chairman.
We now go to Commissioner Breathitt from the great State of
Kentucky.
STATEMENT OF HON. LINDA K. BREATHITT
Ms. BREATHITT. Thank you, Mr. Chairman and members of the
subcommittee. I appreciate the opportunity to appear before you
today to discuss your energy restructuring legislation. I believe it
is important for Congress and FERC to work in tandem to accom-
plish the critical goal of ensuring the development of a competitive
wholesale electric power market that is fair and efficient and that
benefits consumers.
While I believe FERC has made great strides in the effort to in-
crease wholesale competition over the past several years, I welcome
32
congressional guidance through legislation that assists in articu-

lating and clarifying the steps that must be taken toward this end.
I am supportive of the policies underlying H.R. 3406, and I am
pleased to see that it is consistent with many of the comments I
have made in past hearings before this subcommittee. As I set
forth in more detail in my written testimony, I welcome congres-
sional clarification of FERCs authority with respect to RTOs and
expansion of our authority in the areas of civil and criminal pen-
alties for violations of the Federal Power Act. I support the repeal
of PURPA and PUHCA, and I agree that interconnection rules
should be standardized. I also believe the bills approach to trans-
mission siting represents a great improvement over the current ju-
risdictional scheme.
I would like to take this opportunity to highlight an aspect of
H.R. 3406 that I cannot support, and that is repeal of Section 203
of the Federal Power Act, which embodies the Commissions merger
review authority. I dont agree with the basic underlying premise
that FERCs merger review is redundant. All merger reviews are
not created equal. Unlike any other agency with jurisdiction over
mergers, our agency uses a different test, and that is the public in-
terest standard. This is significantly different and distinct from the
no harm to competition review employed by other agencies, and
I urge this subcommittee to continue allowing FERC to protect the
public in this regard.
With this exception, while my testimony highlights various de-
tails on which I suggest minor changes, I believe that your work
on this document ultimately will serve to aid the Commission and
the public as we move ahead with our agenda. I didnt address the
other topics that you said may likely come up today. I stuck to your
legislation, and I will happy to get to those others if the time
comes.
[The prepared statement of Hon. Linda K. Breathitt follows:]
PREPARED STATEMENT OF HON. LINDA K. BREATHITT, COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION
Mr. Chairman and Members of the Subcommittee: I appreciate the opportunity
to appear before you today to discuss the Subcommittees proposed energy restruc-
turing legislation. I believe it is important for Congress and the Federal Energy
Regulatory Commission (FERC) to work in tandem to accomplish the critical goal
of ensuring the development of a competitive wholesale electric power market that
is fair and efficient and benefits consumers. While I believe FERC has made great
strides in the effort to increase wholesale competition over the past several years,
I welcome Congressional guidance through legislation that assists in articulating
and clarifying the steps that must be taken toward this end.
My testimony today will comment on H.R. 3406 and highlight specific aspects of
the proposed legislation that I consider to be especially important from the perspec-
tive of a federal energy regulator. As a general matter, I am very supportive of H.R.
3406. I have testified before this Subcommittee many times on restructuring issues,
and I am pleased that this proposed legislation is largely consistent with many of
the views I have expressed. I am also pleased that the bill would have the effect
of promoting small-scale renewable generation. As I will discuss in greater detail
below, however, there is one important exception: I do not support the proposed re-
peal of section 203 of the Federal Power Act (FPA).
Title I of the proposed legislation deals with electric supply. Among the provisions
of Title I, I would like to address my comments to interconnection, the Public Utility
Holding Act of 1935 (PUHCA), the Public Utility Regulatory Policies Act of 1978
(PURPA), and merger review. I have previously testified before this subcommittee
that interconnection rules should be clarified and standardized in order to ensure
that new sources of generation are able to interconnect to the transmission system.
33
The Commission accelerated this process of standardization in October with the
issuance of an Advanced Notice of Proposed Rulemaking (ANOPR) addressing proce-
dures and protocols for interconnection. The ANOPR encourages parties to reach
consensus on non cost-related issues of transmission interconnection and uses as a
strawman the ERCOT model as supplemented by current Commission inter-
connection policy. Reports of the progress being made are positive, and I support
issuance of a NOPR as soon as possible. The Commissions intention is to instruct
parties to take up the issues of cost responsibility for transmission interconnections
in the second phase of the transmission interconnection rulemaking.
Section 101 of the proposed legislation would decide the major issue of cost re-
sponsibility by assigning system upgrade costs to the generator. I believe these pric-
ing decisions need to be made carefully and with consideration of the multiple fac-
tors at issue. Although this legislative process certainly is one forum for deciding
this important issue, the cost responsibility aspect might also benefit from com-
ments and a consensus process such as the Commission plans for the second phase
of our rulemaking. I expect the second phase, dealing with cost issues, will be more
difficult and contentious; many states already are expressing their views.
Section 101 of the proposed legislation also requires the Commission to promul-
gate the technical standards for generators interconnecting with distribution facili-
ties. Although it is no modest undertaking to establish national standards for dis-
tribution interconnections, I do believe reducing obstacles for small-scale distributed
generation can produce good results. Distributed generation can increase options for
consumers and would provide added reliability to the grid. Standards for all players,
as well as the net metering provisions included in this legislation, may encourage
the growth of this fledgling movement toward decentralization of the electric grid.
Of course, we should expect the states to insist on a process that allows their opin-
ions and concerns to be heard since this section shifts jurisdiction to the federal
level.
The proposed legislation repeals PUHCA and replaces it with increased access by
the Commission and state regulators to certain books and records. I support this
legislation. The proposed legislation also repeals prospectively the PURPA manda-
tory purchase obligation. I support the repeal of the mandatory purchase require-
ment in Section 210 of PURPA. I also support proposed section 133 of the bill, which
would grandfather existing PURPA contracts.
I would like to highlight Subtitle D of Title I, which would eliminate FERCs
merger review authority now embodied in section 203 of the FPA. This is the single
aspect of this proposed legislation that I cannot support. The title itself of Subtitle
D, Redundant Review of Certain Matters, reveals my basic concern in this regard:
I do not agree that FERC merger review is redundant. All merger reviews are not
created equal. FERCs FPA public interest standard is different from the no harm
to competition antitrust standard of the Sherman Act and the Clayton Act. The rel-
evant information required for the type of review conducted by FERC is not the
same information required by another agency conducting antitrust review of the
same merger. While the same merger may be reviewed by various agencies, the
analyses are not parallel; standards and requirements vary from agency to agency.
I believe it is important for FERC to continue its public interest-focused merger
analysis, which looks at a mergers effects on rates, regulation, and competition.
FERC, in its regulatory role, is particularly attuned to the issues that may arise
as a result of competition and industry consolidation, including technical issues and
new kinds of mergers that may lead to the blurring of traditional utility services
with other business lines. By acknowledging these issues, I believe that FERC has
developed a dynamic and flexible processone that is required in todays market.
I urge the Subcommittee to continue to allow FERC to retain the authority to pro-
tect the public in this respect.
Title II of the proposed legislation deals with transmission operation. Section 201
of the proposed legislation would allow the Commission to require all public utilities
and transmitting utilities to offer open access transmission services, extending the
requirement for open access to transmitting utilities that are not public utilities. As
I have testified on other occasions, I believe it is important to have equal and open
access to all transmission at nondiscriminatory rates and comparable terms and
conditions. At the same time, the public power sector has expressed concerns unique
to its status, and these concerns should be addressed with respect to sections 201
and 202. Chairman Woods testimony requests a change to the legislation to allow
all tariffs for open access transmission service be on file with the Commission. I
share the Chairmans concerns on these issues and support his testimony in this
regard.
Section 202 addresses Regional Transmission Organizations (RTOs). There is no
more important effort underway at FERC today than the formation of RTOs. Since
34
the Commission began promoting RTOs as a means to remove barriers and impedi-
ments present in wholesale electricity markets, I have been fully committed to the
goal of RTO formation. While there is room for disagreement on the best path to
attain the goal of fully functioning RTOs, FERC is very actively pursuing the com-
pletion of the development of RTOs with clear responsibilities, independence, and
sufficient scope.
When the Commission issued Order No. 2000 in December 1999, we decided to
adopt an open and collaborative process that relied on voluntary regional participa-
tion. Since that time, I have strongly urged that FERC not depart from the basic
philosophies embodied in Order No. 2000, particularly in the absence of a formal
decision to do so, informed by the views of interested parties and state commissions.
In my view, sufficient question remains over FERCs authority to mandate the for-
mation of, or participation in, RTOs, such that any moves on our part toward a
mandate will be counterproductive to FERCs ultimate goals. My concern is that this
lack of clarity could lead the industry and the Commission to divert resources away
from the important task of RTO implementation, and instead toward expensive and
time-consuming litigation over FERCs authority. I therefore support Congressional
clarification of FERCs authority with respect to RTOs.
Proposed section 202 mandates that all transmission utilitiesboth investor-
owned utilities and public power/electric power cooperative utilitiesparticipate in
an RTO. To the extent this direction will eliminate any existing uncertainty regard-
ing FERCs authority and permit RTO formation to proceed expeditiously, I support
it. Proposed section 202 also requires FERC to establish uniform market rules, in-
cluding the establishment and enforcement of seams agreements. This direction is
consistent with a generic rulemaking proceeding that FERC already has announced.
While the RTO standards embodied in the proposed legislation are, for the most
part, consistent with those established in Order No. 2000, I believe it is possible
that RTO procedures and standards may need to be adapted over time. In his testi-
mony, Chairman Wood suggests that instead of codifying detailed standards and
procedures for implementation of RTOs, additional flexibility for FERC to oversee
an adaptive process might be warranted. Chairman Wood advocates a legislative ap-
proach that would have Congress adopt a simple provision permitting the Commis-
sion to require RTOs where it finds such RTOs to be in the public interest. I believe
this approach would serve to remove existing uncertainties, while preserving
FERCs ability to tailor its RTO program to an increasingly dynamic marketplace.
If Congress decides to take the approach of codifying RTO standards and proce-
dures, Chairman Woods testimony outlines several concerns regarding (1) the right
of a single RTO applicant for an evidentiary hearing; (2) the requirement for pre-
ponderance of the evidence supporting FERC decisions; (3) the judicial review pro-
vision; (4) the requirement for a proposed RTO to have sufficient generation within
the RTOs boundaries to serve the load within such boundaries; (5) the right of
each pubic utility in an RTO to make rate filings; (6) the definition of market par-
ticipant; and (7) the preclusion of FERC modification to the governance and scope
of an RTO approved before the laws enactment. I share the Chairmans concerns
on these issues and support his testimony in this regard.
Title III of the proposed legislation provides for Commission certification of one
electric reliability organization to develop and enforce reliability standards for the
bulk-power system. I agree that the voluntary reliability system, which has been in
place for over three decades, should be replaced with one in which a self-regulated
independent reliability organization, with oversight by the Commission, establishes
and enforces mandatory reliability standards. I especially support the provisions of
section 216(e), which provides for sanctions and penalties for failure to comply with
reliability rules. In my view, such a change in the manner in which the reliability
of the interconnected grid is overseen and managed is required in order to ensure
a competitive bulk power market.
The provisions of Title IV direct the Commission to conduct a rulemaking to es-
tablish incentive and performance-based rate policies for expansion of transmission
networks to promote expansion of the transmission grid to support the growth of
competitive markets. Section 401 states that such policies should encourage the de-
ployment of new transmission technologies to increase capacity of existing networks
and to reduce line losses; promote environmentally sound transmission design tech-
niques; and promote the efficient use of transmission systems on a real-time basis.
I believe that the Commissions transmission rate policies should encourage and pro-
mote such policy objectives. I would point out that I believe these goals may be
achieved through rate policies other than incentive or performance-based rates. In
my view, policies such as allowing a reasonable return on equity or accelerated de-
preciation for new technologies would act to encourage such investment.
35
Section 402 would give the Commission a backstop role in transmission siting.
I believe that this is certainly an improvement over the present jurisdictional
scheme, in which the Commission has no role in the permitting and siting of new
transmission facilities. However, as I have testified previously, my primary concern
with a backstop role for the Commission is that such an approach could result in
costly and inefficient duplication of processes, records, and efforts by the various
decisional authorities involved in transmission siting.
My preference would be for FERC to be granted federal eminent domain authority
similar to the authority the Commission exercises with respect to the siting of inter-
state natural gas pipelines under the Natural Gas Act. The Commission could de-
velop procedures to ensure cooperation with the states and provide for regional par-
ticipation. I believe that this more centralized approach is preferable from an effi-
ciency standpoint, and will result in less bureaucracy and more timely decisions for
transmission providers and consumers. I am not advocating that the Commission
should have siting authority for electric distribution lines or power plants. I believe
that state governments are best positioned to make those determinations.
Finally, I would like to acknowledge the provisions of Title VII of the proposed
legislation. These provisions strengthen the Commissions authority to assess civil
and criminal penalties for violations of the FPA and increase the level of such pen-
alties. I have advocated such changes and believe they will greatly aid the Commis-
sion in fulfilling its regulatory responsibilities.
In conclusion, I again thank the Subcommittee for this opportunity to comment
upon the Subcommittees proposed legislation. As I have testified in previous hear-
ings before this Subcommittee, the Commission must have sufficient authority to
advance its goals of achieving fair, open and competitive bulk power markets. I be-
lieve that this legislation, with the modifications I have suggested, would clarify our
authority and greatly assist the Commission in realizing the benefits of wholesale
competition.
Mr. BARTON. Thank you.
We now welcome our new Commissioner, Commissioner Nora
Brownell from the great State of Pennsylvania, from Harrisburg to
Washington. I think this is your first time to testify before this
subcommittee. Is that correct?
STATEMENT OF HON. NORA MEAD BROWNELL
Ms. BROWNELL. Actually, it is my second as a Commissioner and
then a few times as a State commissioner, but I am glad to be
back.
Mr. BARTON. We are glad to have you. Your statement is in the
record, and we will ask you to elaborate on it for 6 minutes.
Ms. BROWNELL. And perhaps the next time we come back it will
be to celebrate the passage of a comprehensive energy bill.
I am going to be quick, because I know that the committee has
a lot of questions, and there are a lot of complex issues to discuss.
But I would note that events of the past few monthsSeptember
11, the meltdown of Enron, the confusion of the consumer market
have caused us all to evaluate what we do and how we do it. But
I believe we are at a critical juncture in the development of energy
markets that are needed to support the continued growth of a dig-
ital economy. The issues are complex, the answers are not easy, but
they are issues that have a long-term impact on our country.
We can succumb to inertia and the fear of change, and we can
leave the American public saddled with an inadequate, inefficient
electric system or we can complete the transformation of that in-
dustry into the economically competitive, reliable, technologically
vibrant marketplace that this Nations consumers deserve. I believe
that comprehensive energy legislation and the work that we are
doing at FERC can provide the certainty and reliability that all
stakeholders need, that consumers need to have confidence in the
36
system, that investors need to invest in the system and that new
technology providers need to introduce what I think is a vibrant
new future that we have not even seen yet.
To accomplish this, I think we need large Regional Transmission
Organizations. I think we need to ensure there is sufficient infra-
structure, and we need to guarantee there are equitable, well-un-
derstood business rules that reflect the realities of a restructured
market. There is much in this bill that I support and have articu-
lated that in my statement, and I really applaud you for your vi-
sion and the comprehensive nature of this bill. I do have concerns
over some of the limitations that this might put on FERC in estab-
lishing RTOs and the rules under which they function, and I do
have some concerns about our merger authority. But I do believe
that we can work together with this agency and the other agencies
represented here to get the answers that we need and to have this
train finally arrive at the station since it left so long ago.
[The prepared statement of Hon. Nora Mead Brownell follows:]
PREPARED STATEMENT OF NORA MEAD BROWNELL, COMMISSIONER, FEDERAL ENERGY
REGULATORY COMMISSION
I. INTRODUCTION
Mr. Chairman and Members of the Subcommittee: Thank you for the opportunity
to share my thoughts on H.R. 3406 as well as the Commissions recent actions con-
cerning wholesale electricity markets. We are at a critical juncture in the develop-
ment of energy markets to support the growth of a digital economy. We can suc-
cumb to inertia and fear of change, and leave the American public saddled with an
inadequate, inefficient electric system. Or, we can complete the transformation of
that industry into the economically competitive, technologically vibrant marketplace
that this nations consumers deserve. I, for one, am committed to the latter course
of action.
Passage of a comprehensive energy bill will certainly settle the many concerns
created by the lack of a long-term energy policy for our country. I also believe the
resolution of the issues related to the restructuring of the electricity markets will,
in fact, act as an economic stimulus and unleash capital for the development of in-
frastructure and new technologies. I also believe that we at FERC must lay out a
clear strategy for completing the transformation of electricity markets. Not only is
investment constrained, but business plans are hampered by uncertainty. I am con-
vinced that the prerequisite to success is creation of a clear and cogent course of
action that will bring certainty and stability for all of the stakeholders by: (1) estab-
lishing large Regional Transmission Organizations (RTOs); (2) ensuring there is suf-
ficient infrastructure; and (3) ensuring there are equitable, well understood business
rules that reflect the realities of a restructured marketplace.
There are many provisions in H.R. 3406 that I support as consistent with this
course of action, including the call for standardization of interconnection procedures,
the establishment of minimum federal net metering standards, the repeal of the
Public Utility Holding Company Act (PUHCA) and the Public Utility Regulatory
Policies Act (PURPA), the increase in enforcement tools, and the grant of backstop
transmission siting authority to the Commission as well as the authority to require
all transmitting utilities to offer open access transmission service. I commend the
continued leadership and hard work of the members of the Subcommittee. I would,
however, suggest that Section 202, concerning the formation of RTOs, and Section
141, repealing Commission review of mergers, be amended.
II. SECTION 202RTO FORMATION
A. RTO formation has been delayed at the expense of electricity customers

Large, independent RTOs can improve grid reliability by facilitating transmission
planning across a multi-state region, create better pricing mechanisms such as
eliminating pancaking, improve efficiency through better congestion management,
and attract investment in infrastructure by facilitating regional consensus on the
need for construction. Consistent with the Energy Policy Act of 1992, the Commis-
sion has been working to foster RTOs for a number of years. So far, the Commission
37
has relied on the voluntary efforts of utilities to form RTOs, and has held mediation
and outreach to assist market participants in reaching consensus on RTO govern-
ance, scope, and configuration. Nevertheless, to date not a single RTO is up and
running.
I believe the price of doing nothing on RTO formation grows daily and that we
must move forward. The Commission has recently initiated a number of processes
to help ensure that any actions we take concerning the development of RTOs be
ones that will produce the most benefits for customers and that adequately accom-
modate states interests. First, the Commission recently hired an outside consultant
to perform an updated study of the costs and benefits of RTO formation. Second,
we have begun to consider the standard RTO design features that will best ensure
a seamless national wholesale electricity market. During the week of October 15,
2001, we held a conference to discuss the issue of standard RTO design features
with a wide range of market participants and state commissions, and we will be
doing more outreach and issuing a proposed rule on the subject. Our RTO con-
ference demonstrated considerable consensus on a number of issues, such as conges-
tion management, energy markets, and market monitoring. Third, we have set up
a new program within FERC under which a number of regional panels consisting
of Commission staff and state commission staff will be established to ensure better
coordination with our state regulatory counterparts on RTO development issues.
It may soon become necessary for the Commission to take more direct action to
establish mandatory RTOs. I believe the current language of the Federal Power Act
already gives us the authority to take such action, and I will encourage my col-
leagues to join me in exercising that authority in a prudent manner. Nevertheless,
the few who oppose RTOs would likely file judicial challenges to the exercise of that
authority, thus legislative clarification would save us all the time and expense of
litigation.
B. Section 202 would not speed development of competitive markets
Section 202 of H.R. 3406 does clarify that the Commission has the authority to
require transmitting utilities, whether investor- or publicly-owned, to join an RTO.
However, the following provisions of Section 202 would leave the Commission so
hamstrung in its exercise of this authority, that I fear we would make no greater
progress toward the development of truly competitive wholesale electricity markets
than we have under the current statute:
Narrowly prescribing Commission review of an RTO applicationSection 202 limits
the Commissions authority over the development of specific RTOs to proposing
modifications to a utilitys application to form or join an RTO. Further, the
Commission can only propose such modifications when the application fails to
satisfy a rigid and limited set of standards specified in the bill.
Allowing applicants to unnecessarily delay processThe provisions of Section 202 re-
quiring the Commission to hold an evidentiary trial-type hearing on the pro-
posed modifications whenever an applicant so requests and imposing a stay of
the Commissions order whenever an applicant seeks judicial review could en-
able one RTO applicant to significantly delay and increase the cost of RTO for-
mation.
Making it easier for applicants to overturn Commission ordersSection 202s re-
placement of the existing substantial-evidence standard for judicial review
under the Federal Power Act with a preponderance-of-the-evidence standard
for review of Commission modifications to RTO applications would make it easi-
er for applicants to overturn such modifications.
C. Section 202 should be replaced with a simple affirmation of Commission authority
to issue such RTO orders as are in the public interest
I believe that Section 202 may not achieve the goals that the Subcommittee has
identified, i.e., the creation of competitive markets. Therefore, I urge this Sub-
committee either to replace it with a provision simply affirming the Commissions
authority to issue such orders concerning the establishment, design, and operation
of RTOs, and the participation of transmitting utilities therein, as are in the public
interest. I would also urge the Subcommittee to consider tax code amendments to
ensure that electric cooperatives and public power entities do not lose their tax-ex-
empt status by transferring transmission assets over to a for-profit RTO.
III. SECTION 141-MERGER REVIEW
Section 141 would repeal Section 203 of the Federal Power Act and, thus, leave
review of mergers and other dispositions of public utility facilities to the Depart-
ment of Justice and the Federal Trade Commission. While I support coordination
of federal agency review of proposed utility mergers to ensure that such reviews are
38
not duplicative or overly time-consuming, I do not believe it is appropriate to elimi-
nate FERC review. The Commission has knowledge of the electric utility industry
that the federal antitrust agencies do not, and Commission review is necessary to
ensure that mergers and other dispositions are consistent with the public interest.
IV. OTHER PROVISIONS OF H.R. 3046
Although I would suggest changes to Sections 202 and 141, there are other provi-
sions of H.R. 3046 that I heartily endorse.
A. Section 101 would ensure standardization of interconnection procedures and allow
consideration of an applications effect on competition
Section 101 calls for standardization of interconnection procedures. I strongly sup-
port the development of standardized interconnection procedures, and I am happy
to report that the Commission is conducting a rulemaking to address this issue.
I further support the proposed amendment of the criteria for evaluating an inter-
connection application. Under the existing language of section 210 of the Federal
Power Act, the Commission may grant an application if it is in the public interest
and it would either encourage overall conservation, optimize efficiency, or improve
reliability. This bill would allow the Commission to grant an application if it were
in the public interest and promoted competition. This language allows the Commis-
sion to continue to consider conservation, efficiency and reliability, while also per-
mitting the Commission to consider competitive goals that will truly benefit con-
sumers.
B. Section 102s net metering standards would remove a barrier to entry of new tech-
nology
I support the bills call for minimum federal net metering standards. Most utilities
have been slow to provide for net metering, and net metering is an essential step
in the development of viable markets for new technologies, such as distributed gen-
eration. The establishment of national minimum standards on which states will
build net metering programs would enable this important new technology a chance
to compete. Net metering is also a valuable tool for consumers who want to be ac-
tively involved in their purchasing decisions.
C. Sections 111-125 would appropriately repeal PUHCA
I support the bills repeal of PUHCA. PUHCA was necessary to address abuses
that existed a half-century ago. However, that statute has not only outlived its use-
fulness, it is actually thwarting needed development of our electricity resources by
subjecting registered utility holding companies to heavy-handed regulation of ordi-
nary business activities and to outdated requirements that they operate integrated
and contiguous systems. One of PUHCAs perverse effects is that it causes foreign
companies to buy here and U.S. companies to invest overseas. Nevertheless, I appre-
ciate the concerns of those, like the rural electric cooperatives, who have opposed
elimination of certain safeguards that PUHCA provides against market power. The
Commission is aware of the concerns of the cooperatives and of the problems with
market power in general, and we are engaged in an overhaul of our efforts at mar-
ket monitoring and market power protection. I believe that Section 111-125 strikes
an appropriate balance by replacing PUHCA with increased access by the Commis-
sion and state regulators to certain books and records.
D. Sections 131-134 would appropriately eliminate prospective PURPA forced sales
I support the bills prospective elimination of the forced sale provision of PURPA.
PURPA was enacted out of concern over dependence on oil for electric generation.
Now, 22 years later, when a gas-fired generator can be on-line in less than two
years, and many advances are being made in distributed generation, PURPAs sub-
sidies for certain types of generation are no longer appropriate.
E. Section 201 would ensure non-discriminatory access to the entire transmission
grid
Section 201 would grant the Commission the authority to require all transmitting
utilities (not just those that constitute public utilities under the Federal Power
Act) to offer open access transmission service. I believe that all interstate trans-
mission facilities should be under one set of open access rules, including the facili-
ties owned and/or operated by municipals, cooperatives, the Tennessee Valley Au-
thority, and the federal power market administrations and regardless of whether
they are used for unbundled wholesale, unbundled retail, or bundled retail trans-
actions. Having all transmission under one set of rules will ensure a properly func-
tioning and transparent transmission grid.
39
F. Section 301 will promote transmission reliability
I support Section 301, which grants the Commission jurisdiction over electric reli-
ability organizations. The reliability of the electrical grid is critical to this nations
safety and economy, and it is appropriate to have a greater governmental role in
reviewing reliability standards.
G. Section 402 will remove logjams to siting needed transmission
As I stated in my September 21, 2001 testimony before this Subcommittee, I be-
lieve the Commission should have backstop authority to site transmission facilities.
State-by-state siting of such transmission superhighways is an anachronism that
impedes transmission investment and slows transmission construction. There are
many models for regional planning that might be considered. For example, the
Western Governors Association has been working hard to address regional issues in
the West. Therefore, I support section 402, which allows the Commission to author-
ize construction of transmission facilities that are consistent with the public interest
when the state has withheld or delayed approval. But I also believe new models
may respond to siting issues in a way that recognizes state concerns while accepting
the reality that electricity planning and operations are regional, if not national, in
nature.
H. Sections 701-703 would provide needed expansion of enforcement authority
The Commission must have an expanded role in monitoring for, and mitigating,
market power abuse. The enabling statutes of the Securities and Exchange Commis-
sion and the Federal Communications Commission provide for a range of enforce-
ment measures, such as civil penalties. I believe that providing FERC with similar
authority would send a powerful message to electricity market participants that we
take violations of the Federal Power Act just as seriously. Therefore, I support H.R.
3406s recognition of the Commissions refund authority over non-public utilities
that provide transmission service or power to a public utility. I also support the
bills increase in the level of criminal penalties allowed under Section 316 of the
Federal Power Act, as well as the bills authorization of civil penalties for violation
of any provision of Part II of the Federal Power Act.
V. CONCLUSION
I appreciate the enormous commitment of time and energy that the Chairman and
the other members of this Subcommittee have put into developing legislation to help
transform the electricity industry into the thriving force it should be. There are
many competing interests to be satisfied against a larger goal: the creation of a ro-
bust, viable, liquid energy market supported by an enhanced infrastructure. Our
country is well served by change leaders such as yourself. I thank you for the oppor-
tunity to share my thoughts with you.
Mr. BARTON. We now welcome Commissioner Massey from the
great State of Louisiana. He has obviously been here a few times.
Your statement is in the record in its entirety. We would ask you
to elaborate for 6 minutes. Arkansas, I am sorry, I said Lou-
isianaArkansas.
STATEMENT OF HON. WILLIAM L. MASSEY
Mr. MASSEY. Thank you, Mr. Chairman. I respect and applaud
your efforts to enact electricity restructuring legislation. My view
is that without your help with changes in the law, the restruc-
turing of the electric industry will continue to be a patchwork. Nec-
essary transmission investments may not keep pace with the needs
of competitive markets, and this is a very serious problem. And it
will be much more difficult to maintain reliability long term.
Thus, a number of provisions of this legislation are excellent and
have my support, and I have concerns about others. In particular,
I support the provisions related to standardized generation inter-
connection, to ensure demand responsiveness, and those related to
mandatory reliability rules, civil penalties and transmission infra-
structure and siting. I particularly appreciate your interest, Chair-
man Barton, in solving this knotty problem related to transmission
40
siting, and it seems to me that you have proposed a manner of pro-

ceeding that balances competing concerns and is reasonable. I ap-
plaud it, and I think it will help get necessary transmission built.
These are all excellent provisions. I support placing all trans-
mission under one set of Federal rules. I think we have to do this.
The bill sends a strong signal that RTOs are in the public interest
and that FERC may require their formation, and I applaud this.
The legislation also includes provisions that I cannot support,
however. The Commissions merger review authority should not be
repealed. Indeed, this authority should be strengthened to ensure
that consumers are protected from consolidations that may choke
off the very competition that we are striving to facilitate. And I
would like to associate myself with the remarks of Commissioner
Breathitt on this very point. In addition, I do not support legisla-
tively tying FERCs hands with respect to RTO approval standards
and hearing procedures. These should remain a matter of Commis-
sion policy that may evolve over time with the changing needs of
competitive markets.
Let me close by saying, since members of the subcommittee have
raised the Enron collapse, I am deeply concerned about the Enron
collapse. I am concerned about the 21,000 employees who are losing
their jobs, I am concerned about investors and retirees who lost
their shirts, I am concerned because Enron was the most visible
corporate symbol of energy deregulation in the world. We should be
looking at whether there are lessons here for our evolving energy
policy.
Based upon what I have seen thus far, however, the collapse was
not related to a failure in energy markets. In fact, a strong argu-
ment can be made that if Enron had focused on energy assets and
energy trading in the United States and had it accurately disclosed
profits and losses, it would probably still be humming right along.
And the energy market appeared to recover rather quickly from the
Enron collapse. We dont know the whole story yet, but what we
know thus far indicates that the market has adjusted reasonably.
Other market participants moved into the breach. The energy mar-
ket itself did not collapse.
Nevertheless, whatever lessons there are here for energy policy
and energy markets, we should heed those lessons. Perhaps the ac-
counting standards and disclosure requirements for a public utility
should be a strengthenedperhaps we should take a look at disclo-
sure requirements for all public utilities. I have an open mind. But
the good news here is that the short-term energy markets appeared
to adjust rather quickly to the collapse of the largest energy trad-
ing company in the world. Thank you, Mr. Chairman.
[The prepared statement of Hon. William L. Massey follows:]
PREPARED STATEMENT OF HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION
Mr. Chairman and Members of the Subcommittee on Energy and Air Quality:
Thank you for the opportunity to testify on the important electricity legislation now
pending before the House and recent Commission activity promoting efficient and
reliable electricity markets.
41
I. H.R. 3406THE ELECTRIC SUPPLY AND TRANSMISSION ACT
A. Interconnection
I am generally supportive of the provisions of Title I. Section 101 addresses inter-
connection standards. The Commission has made a firm decision to move forward
on developing standard procedures and agreements regarding interconnection and
will likely do so in a way that is consistent with section 101.
B. Demand response
Section 103 provides for implementation of price responsive demand programs. As
I have testified previously, markets need demand responsiveness to price. This is
a standard means of moderating prices in well-functioning markets, but it is gen-
erally absent from electricity markets. When prices for other commodities get high,
consumers can usually respond by buying less, thereby acting as a brake on price
run-ups. If the price, say, for a head of cabbage spikes to $50, consumers simply
do not purchase it. Without the ability of end use consumers to respond to price,
there is virtually no limit on the price suppliers can fetch in shortage conditions.
Consumers see the exorbitant bill only after the fact. This does not make for a well
functioning market.
Instilling demand responsiveness into electricity markets requires two conditions:
first, significant numbers of customers must be able to see prices before they con-
sume, and second, they must have reasonable means to adjust consumption in re-
sponse to those prices. Accomplishing both of these on a widespread scale will re-
quire technical innovation. A modest demand response, however, can make a signifi-
cant difference in moderating price where the supply curve is steep.
Once there is a significant degree of demand responsiveness in a market, demand
should be allowed to bid demand reductions, or so called negawatts, into organized
markets along with the megawatts of the traditional suppliers. This direct bidding
would be the most efficient way to include the demand side in the market. But how-
ever it is accomplished, the important point is that market design simply cannot ig-
nore the demand half of the market without suffering painful consequences, espe-
cially during shortage periods. There was virtually no demand responsiveness in the
California market. Customers had no effective means to reduce demand when prices
soared.
It is important for Congress to send a message that instilling a significant meas-
ure of demand responsiveness into electricity markets is in the public interest. This
legislation does just that, and I endorse it.
C. PUHCA and PURPA
Subtitle B of Title I repeals PUHCA. I am pleased that the bill appears to include
important provisions regarding state and federal access to the books and records of
holding companies and their subsidiaries.
Subtitle C of Title I repeals PURPA on a going forward basis. I would support
such repeal of PURPA if there were a mechanism to promote the development of
renewable resources, such as a reasonable portfolio standard.
D. Review of Mergers
Section 141 repeals the Commissions authority to review mergers. I do not sup-
port this provision. As we strive to move toward competitive markets and light-
handed regulation, the Commissions ability to remedy market power is increasingly
important. Market power is likely to exist in the electric industry for a while. It is
unreasonable to expect an industry that has operated under a heavily regulated mo-
nopoly structure for 100 years suddenly to shed all pockets of market power. An
agency such as FERC with a broad interstate view must have adequate authority
to ensure that market power does not squelch the very competition we are attempt-
ing to facilitate.
The Commissions authority over mergers is important. We are seeing unprece-
dented industry consolidation now. While mergers can produce efficiencies, they can
also increase both horizontal and vertical market power. The Commission is particu-
larly well suited to evaluate proposed mergers involving electric utilities. The Com-
missions detailed experience with electricity markets and its unique technical ex-
pertise can provide critical insights into a mergers competitive effects. In addition,
the Commissions duty to protect the public interest is broader than the focus of the
antitrust agencies and thus allows us to better protect consumers from other pos-
sible effects of a merger, such as unreasonable costs. As the architect of Order No.
888 and the RTO Rule, Order No. 2000, the Commission must retain the authority
to condition a merger to ensure consistency with broader policy goals. And unlike
the antitrust agencies, the Commissions merger procedures allow public interven-
42
tion and participation in proceedings critical to the restructuring of this vital na-
tional industry.
For these reasons, I would not support any weakening of the Commissions merg-
er authority. Indeed, to ensure that mergers do not undercut our competitive goals,
the Commissions authority over electricity mergers must be strengthened in a num-
ber of ways. The Commission should be given direct authority to review mergers
that involve generation facilities. The Commission has interpreted the Federal
Power Act as excluding generation facilities per se from our direct authority, al-
though that interpretation is currently before the courts. It is important that all sig-
nificant consolidations in electricity markets be subject to Commission review. For
the same reason, the Commission should be given direct authority to review consoli-
dations involving holding companies.
I am also concerned that significant vertical mergers can be outside of our merger
review authority. Under section 203 of the FPA, our merger jurisdiction is triggered
if there is a change in control of jurisdictional assets, such as transmission facilities.
Consequently, consolidations can lie outside of the Commissions jurisdiction de-
pending on the way they are structured. For example, a merger of a large fuel sup-
plier and a public utility would not be subject to Commission review if the utility
acquires the fuel supplier because there would be no change in control of the juris-
dictional assets of the utility. If the merger transaction were structured the other
way, i.e., the fuel supplier acquiring the utility, it would be subject to Commission
review. Such vertical consolidations can have significant anticompetitive effects on
electricity markets. Those potential adverse effects do not depend on how merger
transactions are structured, and thus our jurisdiction should not depend on how
transactions are structured. Therefore, I recommend that the Commission be given
authority to review all consolidations involving electricity market participants, how-
ever structured.
E. Open Transmission Access
Section 201 allows the Commission to require all transmitting utilities as well as
public utilities to offer open access transmission service. I am generally supportive
of placing all transmission owners under the same set of rules. I have concerns,
however, with codifying the manner in which the Commission should calculate
stranded costs. Such calculation should be left to the Commissions discretion and
judgment.
F. Regional Transmission Organizations
Section 202 sets out a number of provisions regarding RTOs and RTO formation.
I am particularly pleased that this legislation sends a clear message that RTOs are
in the public interest. Nevertheless, I am concerned with the proposals to codify
matters such as RTO standards, hearing requirements, and when the Commission
may or may not make modifications to existing RTOs. It would be far more useful
to give the Commission express authority to require RTO formation under standards
determined to be appropriate by the Commission. This would allow standards to
evolve along with the requirements of competitive markets.
G. Reliability
Section 301 provides for Commission certification of an organization to develop
and enforce reliability standards. The industry needs mandatory reliability stand-
ards. Vibrant markets must be based upon a reliable trading platform. Yet, under
existing law there are no legally enforceable reliability standards. Compliance with
the reliability rules of the North American Electric Reliability Council (NERC) is
voluntary. A voluntary system is likely to break down in a competitive electricity
industry.
I support legislation that would lead to the promulgation of mandatory reliability
standards. A private standards organization with an independent board of directors
could promulgate mandatory reliability standards applicable to all market partici-
pants. These rules would be reviewed by the Commission to ensure that they are
fair and not unduly discriminatory. The mandatory rules would then be applied by
RTOs, the entities that will be responsible for maintaining short-term reliability in
the marketplace. Mandatory reliability rules are critical to evolving competitive
markets, and I urge Congress to enact legislation to accomplish this objective.
Section 301 seems reasonable and I support its adoption.
H. Transmission Infrastructure
Section 401 directs the Commission to adopt policies that facilitate construction
of transmission facilities needed for competitive electricity markets, and to report
to the Congress on transmission adequacy. I support these goals. I am particularly
supportive of the legislations specific goals such as promoting economically efficient
43
enlargement of transmission networks, including the provision of proper price sig-
nals so that new generation and transmission is built where it provides the lowest
overall cost to consumers.
I. Transmission Siting
Section 402 enacts backstop transmission siting authority for the Commission. In
previous testimony, I have recommended that Congress transfer to the Commission
the authority to site new interstate electric transmission facilities. The transmission
grid is the critical superhighway for electricity commerce, but it is becoming con-
gested because of the new uses for which it was not designed. Transmission expan-
sion has not kept pace with changes in the interstate electricity marketplace.
Although the Commission is responsible for well functioning electricity markets,
it has no authority to site the electric transmission facilities that are necessary for
such markets to thrive and produce consumer benefits. Existing law leaves siting
to state authorities. This contrasts sharply with section 7 of the Natural Gas Act,
which authorizes the Commission to site and grant eminent domain for the con-
struction of interstate gas pipeline facilities. Exercising that authority, the Commis-
sion balances local concerns with the need for new pipeline capacity to support
evolving markets. We have certificated well over 15,000 miles of new pipeline capac-
ity during the last six years. No comparable expansion of the electric grid has oc-
curred.
I continue to recommend legislation that would transfer siting authority to the
Commission. Such authority would make it more likely that transmission facilities
necessary to reliably support emerging regional interstate markets would be sited
and constructed. A strong argument can be made that the certification of facilities
necessary for interstate commerce to thrive should be carried out by a federal agen-
cy.
Adequate grid facilities are essential to robust wholesale power markets. I am
confident that transmission will be built in sufficient quantities if siting authority
is rationalized, rate jurisdiction is clarified, and adequate cost recovery mechanisms
and risk-based rates of return are allowed.
Proposed section 402 provides the Commission with backstop siting authority to
ensure that the necessary transmission facilities are built. This provision appears
to provide appropriate respect for the siting prerogatives of the states and has my
support.
J. Federal Utilities
I have long advocated placing all transmission providers under the same set of
rules. Placing TVA, BPA and the Federal Power Marketing Administration under
Commission authority has my full support.
Section 523 permits BPA to transfer operational control of its transmission facili-
ties to an RTO. Although I strongly support allowing BPA to participate in an RTO,
I would not limit its participation in an RTO of a specific scope as this section does.
In addition, I would recommend that Congress specifically authorize TVA and the
PMAs to participate in RTOs determined to be appropriate by the Commission.
K. Penalties
Section 703 expands the scope of civil penalties to include all of Part II of the Fed-
eral Power Act. This provision moves toward giving the Commission much needed
tools to police the markets and I support it.
II. RECENT FERC ACTION ON RTO FORMATION AND MARKETS
A. RTO Formation
The Commission has received a number of proposals to form RTOs, and has acted
on most such proposals. In general, the Commission has strongly encouraged RTOs
to grow larger and has provided guidance on independence and RTO governance.
In July, the Commission issued an order expressing its preference for no more than
four large RTOs in the nation, but has recently indicated that greater flexibility will
be allowed in RTO formation.
During October 15-19, 2001 the Commission held five days of public hearings on
a wide range of issues related to RTO formation and market design. In an order
issued November 7, the Commission indicated a desire to receive additional com-
ment from state commissions with regard to RTO formation, and indicated that ad-
ditional cost benefit analyses on RTOs would be conducted. Also, the Commission
stated its intention to standardize market design rules as appropriate. The Novem-
ber 7 order stated that since it is not possible for all RTOs to be in operation by
our December 15, 2001 deadline, the Commission will set out in future orders a time
44
line for continuing RTO progress in each region. I expect the Commission to act on
such orders in the near future.
B. Market-based Rates
In two orders the Commission issued November 7, 2001, we began to correct se-
vere weaknesses in our market based pricing policy. My longstanding concerns had
been sharpened by the failure of the California market and the economic con-
sequences that spun from it. Weve learned that we must accurately assess market
conditions when depending on markets to discipline prices. And we must provide
adequate refund protection to customers when poorly functioning markets do not
protect them from unreasonable prices.
In AEP Power Marketing, et al., the Commission took three important steps in
our market based pricing policy. First, we concluded that our traditional market
power analysis no longer adequately protects customers against generation market
power.
Second, we announced a new interim analytic screen to protect customers until
we develop the tools we need for the longer term. That interim tool is the Supply
Margin Assessment, or SMA, and will be applied to all sales except those into an
ISO or RTO with approved monitoring and mitigation. This is a major step in the
right direction. The SMA improves on the old analysis by taking into account trans-
mission capability and by looking to the critical notion of a pivotal supplier in a
market. When supplies are tight, prices in electricity markets can run up quickly,
especially when there is a pivotal supplier whose capacity is needed to satisfy de-
mand. The SMA addresses that problem and does not allow pivotal suppliers to
charge market based prices. The SMA is a major improvement. Like most new pol-
icy tools, it is not perfect, but we are moving in the right direction. As with any
analytic method, it is only a snapshot of current market conditions. But if market
conditions change, parties are free to file a complaint showing that the new condi-
tions result in a seller failing the SMA screen.
Third, the Commission applied the SMA to three sellers in the context of their
triennial updated analysis, found that they fail, and put in place innovative mitiga-
tion measures requiring the applicants to offer all uncommitted generation capacity
into the spot market. Sales will be priced at the traditional split savings adder. As
the order points out, maintaining an accurately priced spot market is the single
most important element for disciplining longer term transactions. Thus, with the
spot market mitigation in place, an applicant may freely negotiate longer term
transactions but must post on its web site a portfolio of long term products and
prices that are available.
In another order issued November 20 in EL01-118, the Commission took two addi-
tional important steps. First, we announced the start of a generic proceeding to de-
velop new analytic methods for evaluating markets and market power on a long
term basis. I fully support launching this important initiative. Second, the order ini-
tiated a section 206 proceeding to place a refund condition in the tariffs of sellers
with market based pricing. That condition would prohibit anticompetitive behavior
and the exercise of market power. This is an improvement providing customers with
some added protection, and to that extent I support the order.
But we should do more for customers. The order fails to provide any refund pro-
tection to customers when market structure and market rules are flawed and unjust
and unreasonable rates result. The Federal Power Act states that such rates are un-
lawful. This is precisely the situation in which the Commission found itself in the
California proceeding. We did not make any findings of bad behavior on the part
of any sellers. We found only a market that was badly broken. The risk of a broken
market should not be placed solely on customers. Our tariff condition should provide
for refunds whenever the Commission finds that unjust and unreasonable rates are
charged.
III. CONCLUSION
I stand ready to answer questions and to assist the Subcommittee in any way.
Thank you for this opportunity to testify.
Mr. BARTON. Thank you, Commissioner.
We would now like to hear from the chairman of the Tennessee
Valley Authority. I believe this is your first time to testify.
STATEMENT OF GLENN L. MCCULLOUGH, JR.
Mr. MCCULLOUGH. Before your subcommittee, it is, sir.
45
Mr. BARTON. Yes, sir.

Mr. MCCULLOUGH. Thank you, Mr. Chairman.
Mr. BARTON. Your statement is in the record, and you are recog-
Mr. MCCULLOUGH. Thank you very much, Mr. Chairman and dis-
tinguished members of the subcommittee. I would like to thank
you, Chairman Barton, as well as Ranking Member Boucher, for
your leadership on issues relating to the supply of reliable and af-
fordable electricity throughout the Nation. I would also like to ex-
press my gratitude and appreciation to Congressman Ed Bryant,
Congressman Chip Pickering, Congressman Bart Gordon and Con-
gressman Ed Whitfield, all of whom sit on this subcommittee as
they have been amongst the strongest advocates for the people of
the Tennessee Valley and TVA.
We are very grateful to them for their collective support of the
TVA title. The title represents their consensus, and ours, on the
best way to comprehensively address TVAs place in a more com-
petitive market. I would also like to thank the Tennessee Valley
Public Power Association, the Tennessee Valley Industrial Com-
mittee for their help in drafting this important legislative proposal.
The title, which is now part of H.R. 3406, affirms TVAs role as a
steward within the Valley region, and it maintains the integrity of
TVAs mission. It ensures the availability of affordable electricity
for rural and fixed-income consumers in the Tennessee Valley, and
it ensures the reliability of TVAs power supply and transmission
system.
The specific provisions of the title are discussed in my written
testimony, and TVA and its customers believe that these provisions
are in the best interest of the people and the businesses of our re-
gion. We are grateful to everyone who had a role in developing the
TVA title, and we appreciate the support it has received from mem-
bers of the subcommittee.
It has been more than 2 years since a representative from TVA
appeared before this subcommittee, Mr. Chairman. In that time
there have been many changes, and truly it is a new day at TVA.
Director Skila Harris and I began serving the Valley in November
1999. Director Bill Baxter was sworn in less than 2 weeks ago. We
are committed to making TVA a more responsible and business-like
agency as we work to deliver affordable, reliable power, a cleaner
environment and a vibrant economy for the good of the people.
I would like to report to the subcommittee that TVA is stronger
operationally and financially as our entire organization prepares
for the future of competition. And I am proud to say that through
our diverse power supply, reliable transmission system, operational
and financial performance and leadership in renewable energy and
new technologies, TVA is addressing some of the key concerns in
our Nations energy future. While there is still much work to be
done, I am confident that TVA will add value in the competitive
marketplace as a result of our excellent business performance.
Now let me take just a couple of moments to share some of the
recent examples of the value we provide to the people in the Ten-
nessee Valley. Through distributors of TVA power, we provide af-
fordable, reliable electricity to 8.3 million residential consumers.
And in recent years, we have pushed TVAs performance to new
46
levels of excellence. TVA won the 2001 Quality Cup awarded by the
Rochester Institute of Technology in USA Today for comprehensive
business improvement initiatives. During fiscal year 2001, our cus-
tomer outage duration was three times better than the average of
other U.S. companies we benchmark. In 2000, TVAs Sequoyah and
Browns Ferry Nuclear Plants were ranked as the second and third
most efficient nuclear power generators in the Nation.
TVA is providing financial value to our customers, having had
only one rate increase in 14 years. We reduced TVAs debt by $610
million in fiscal year 2001, which is $160 million more than was
projected. We reduced TVAs overall interest expense as a percent-
age of revenue to its lowest level in more than 15 years. We are
repaying the U.S. Treasury for its original investment in the TVA
power system. For fiscal year 2001, our payment to the Treasury,
including principal and interest, was $55 million. TVA does not re-
ceive any Federal appropriations.
TVAs commitment to excellence also provides value for the envi-
ronment. TVA has conducted a multibillion dollar program to fur-
ther reduce nitrogen oxide and sulfur dioxide emissions from our
generating plants. By 2005, we will have reduced sulfur dioxide
emissions 75 to 80 percent since 1977. Nitrogen oxide emissions
during the ozone season will be down by 70 to 75 percent. In addi-
tion, TVA is one of the first three utilities in the Nation to offer
an accredited green power option for our customers.
In these and many other ways, TVA provides value to our cus-
tomers and value to the Nation. Our priorities are closely aligned
with the issues identified in the national energy policy. By pro-
viding reliable, affordable, environmentally sound energy, TVA is
demonstrating many of the objectives outlined in this policy. I will
work very closely with you, with every member of this sub-
committee as we continue to work on ways to improve affordable,
reliable energy for the Nation.
Thank you for this opportunity to appear before you today, and
I look forward to answering any questions.
[The prepared statement of Glenn L. McCullough follows:]
PREPARED STATEMENT OF GLENN L. MCCULLOUGH, JR., CHAIRMAN, TENNESSEE
VALLEY AUTHORITY
Good afternoon, Mr. Chairman and distinguished members of the Subcommittee.
I would like to thank you, Chairman Barton, as well as Ranking Member Boucher,
for your interest and leadership on issues relating to the continuous supply of reli-
able and affordable electricity throughout the Nation. I assure you that it is an issue
we take very seriously at the Tennessee Valley Authority.
I am pleased to be here today to discuss with the subcommittee how H.R. 3406,
the Electric Supply and Transmission Act, addresses the way in which TVA might
look in the more competitive and restructured electricity marketplace of the future.
Together with the Tennessee Valley Public Power Association (TVPPA), the trade
association representing the distributors of TVA power, and the Tennessee Valley
Industrial Committee (TVIC), which represents TVAs large industrial customers, I
am very pleased that the Valleys consensus language was accepted as the TVA title
in H.R. 3406. Additionally, this language is generally acceptable to the administra-
tion. The regional consensus approach, included in this title, reflects a great deal
of hard work and compromise from stakeholders throughout the Valley, and rep-
resents a common-sense approach to addressing, in a comprehensive manner, the
unique setting of TVA in the electricity marketplace. It is for this reason that I
would like to express a great deal of gratitude and appreciation to Congressman Ed
Bryant, Congressman Chip Pickering, Congressman Bart Gordon, Congressman
Rick Boucher, and Congressman Ed Whitfield, all of whom sit on this subcommittee,
47
as they have all been among the strongest advocates for TVA, TVPPA, TVIC, and
most importantly the Valleys ratepayers, throughout this process.
A NEW DAY AT TVA
It has been more than two years since a representative from TVA last appeared
before this subcommittee. In that time, there have been many changes, and it is a
new day at TVA. We have a completely new Board. Director Skila Harris and I
began serving the Valley in November of 1999 and Director Bill Baxter was sworn
in less than two weeks ago. We are committed to making TVA a more responsible
and business-like agency as we work to deliver affordable, reliable power, a cleaner
environment and a vibrant economy for the good of the people.
I would like to report to the subcommittee that TVA is stronger operationally and
fiscally as the entire organization prepares for the future of competition. While there
is still much work to be done, I am confident that a very bright future lies ahead
for the people we are charged to serve. As a result of our hard work, I am certain
that we will succeed in the competitive marketplace as people continue to recognize
the value TVA delivers through excellent business performance.
TVA BACKGROUND
TVA, which is the Nations largest provider of public power, was created by Con-
gress in 1933 to provide for flood control, navigation, and the generation of electric
power in the seven-state region of the Tennessee Valley, which includes Alabama,
Georgia, Kentucky, Mississippi, North Carolina, Tennessee, and Virginia. This mis-
sion is the cornerstone of our service across the Valley today. Together with 158 mu-
nicipally and cooperatively owned distributor customers, TVA provides electricity ul-
timately to 8.3 million residential consumers throughout the Tennessee Valley,
while managing and developing the Tennessee River watershed and providing lead-
ership for sustainable economic development for the people we serve.
The Tennessee River system is the fifth-largest river basin in the United States.
It stretches 652 miles from Knoxville, Tennessee, to Paducah, Kentucky, where it
flows into the Ohio River and ultimately the Mississippi. It encompasses over 11,000
miles of shoreline, 54 dams and 14 locks. About 34,000 loaded barges travel the
Tennessee River each yearthe equivalent of two million trucks traveling the roads.
TVA, incidentally, no longer receives any federally appropriated funds for the man-
agement and stewardship of the Tennessee River. TVA has used power revenues for
these functions since October 1999.
TVAs power system has a generating capacity of 30,365 MW. TVA operates 59
coal fired units at 11 plants, five nuclear reactors at three plant sites, 29 hydro-
power plants, and five combustion turbine plants. The Bush Administrations Na-
tional Energy Policy released earlier this year recognizes the importance of diversity
in energy supplyincluding new attention to promoting nuclear energy, clean coal
technologies, and renewable energy sources. TVAs mix of coal, nuclear, hydro-
electric, and natural gas-fired generation resources illustrates the value and benefits
of such diversity. In FY2001 TVAs generation sources were approximately 65 per-
cent fossil and combustion turbine, 29 percent nuclear, and 6 percent hydropower.
TVA provides wholesale power to 158 local power distributors and 62 directly
served customers through a network of 17,000 miles of transmission lines in the
seven state region. The TVA Act directs the three members of the Board of Direc-
tors, all of whom are appointed by the President and confirmed in the Senate, to
set TVAs electric rates as low as feasible, while recovering the full costs of pro-
viding electricity for the Valley.
TVAS BUSINESS PERFORMANCE
I am very proud of the way employees from throughout TVA have responded to
the call of service in the public interest throughout the Tennessee Valley. Here are
just a few examples of our most recent accomplishments:
POWER SYSTEM
In Fiscal Year 2001, TVA transmission reliability to customers was 99.999 per-
cent. To put that In perspective, we are three times better in terms of customer
outage duration than the average of the U.S. companies we benchmark.
TVA won the 2001 Quality Cup awarded by the Rochester Institute of Technology
and USA Today for a comprehensive improvement initiative. The improvements
helped TVA set a best-in-industry record for transmission system operating effi-
ciency.
48
The July 2001 issue of Nucleonics Week ranked TVAs Sequoyah and Browns
Ferry nuclear plants as the second and third most efficient nuclear power gen-
erators in the Nation in 2000.
On October 15, 2001, TVA broke ground on the nations first large-scale flow-bat-
tery energy-storage plant. The Regenesys plant, located in Mississippi, will
store electricity during off-peak periods and release it for use when the need
for electricity increases, using a chemical process to store energy.
FINANCIAL
Fiscal Year 2001 power sales increased by 1.2 percent over sales the previous year
and interest expense was down $103 million from the 2000 fiscal year.
TVA reduced debt by $610 million in 2001, $160 million more than projected, for
a total reduction of almost $2.4 billion since 1997. Interest expense in 2001 ac-
counted for 23 percent of TVA revenue, down from a high of 34 percent in 1997,
for the lowest percentage in more than 15 years. TVA continues to be interested
in further cost cutting and debt reduction where warranted.
Fiscal year 2002 budget projections estimate revenues exceeding $7billion for
the first time in TVAs history.
In the fiscal year 2001, TVA sent $55 million to the United States Treasury, $20
million in principle and $35 million in interest, on the original appropriated in-
vestment in TVA. To date, TVA has returned to the Treasury $3.4 billion, in-
cluding interest, on the original investment of $1.419 billion.
ENVIRONMENTAL STEWARDSHIP
On October 4, 2001, TVA announced plans to construct five scrubbers, one each
at fossil plants in Kentucky and Alabama, and three at two plants in Ten-
nessee. They will cost about $1.5 billion altogether and when completed will col-
lectively reduce emissions of sulfur dioxide by more than 200,000 tons per year.
At that point TVA will have reduced total SO2 emissions by 85 percent since
1977.
TVA is also in the midst of a $1 billion program to reduce nitrogen-oxide emis-
sions at its plants by constructing 18 selective-catalytic-reduction systemsor
SCRson 25 coal-fired generating units. It is one of the most massive pollution-
control programs in the nation. This will reduce TVAs NOX emissions by 70 to
75 percent during the ozone season by 2005.
TVA is one of only three utilities in the nation to offer a fully accredited Green
Power option to its customers. Along with participating distributors, TVA offers
residential consumers 150 kilowatt-hour blocks of electricity that include a port-
folio of wind, solar, and land-fill gas generation.
TVAs power system is setting production records, operating more efficiently and
more cost-effectively than at any time in the past three decades, and TVA has
had only one rate increase in 14 years. Affordable, reliable electric power is the
fuel of our regions economy, and TVA is performing as a business as it delivers
power production, economic growth and environmental stewardship for the re-
gion.
THE TVA TITLE
Once again, I would like to express my appreciation for the subcommittees leader-
ship on electricity issues and to you specifically, Chairman Barton, for working
closely with members from the Tennessee Valley delegation on issues relating to
TVA. As a Federal corporation, TVA plays a unique role in meeting the power sup-
ply needs of the seven-state Tennessee Valley region, and there are statutory and
regulatory issues that affect our region that are not experienced by investor-owned
utilities. As a result, TVA has been involved in extensive discussions with distribu-
tors of TVA power and industries directly served by TVA in an effort to reach con-
sensus on the appropriate role for TVA to play in a future restructured competitive
environment. The TVA provisions that are part of H.R. 3406 reflect that consensus,
although they are still under review within the Administration. Some of the key
provisions within the TVA title in H.R. 3406 include:
Equitable Competition
Restrictions to fair competition, such as the TVA Fence and Anti-Cherry Pick-
ing amendment will be removed simultaneously on the effective date of federal
legislation.
49
TVA Power Sales
TVA will only sell electricity outside of the existing service area at the wholesale
level. These sales will be limited to electricity that is excess to the demand of
its customers in the TVA service area.
TVA will be permitted to sell to its existing retail customers inside the TVA serv-
ice area. Only if retail open access is implemented in a distributors service area
will TVA be allowed to sell to new retail customers in that distributors service
area.
Regulation of TVA Transmission System
TVA transmission service rates, terms and conditions will be subject to regulation
by the Federal Energy Regulatory Commission.
It would come as no surprise to any of you that TVA is a large and complex orga-
nization and quite different from any other utility in the Nation. The area in which
TVA can serve electricity is limited by law. The boundary that was established by
the 1959 amendments to the TVA Act is known as the fence. While TVA is limited
outside the fence, other utilities are limited in their ability to serve loads within the
fence. Many of these unique and complex issues may require Congressional action.
TVAs mission, as codified by the TVA Act, is to serve the people of the Valley.
There is a key theme throughout the TVA title contained in H.R. 3406 that I would
like to emphasizethe title continually reaffirms TVAs role as a steward within the
Valley region. The original mission is left unchanged by the title I have come here
to discuss today.
In the effort to maintain the integrity of our original mission, TVA has agreed
to several restrictions that I am certain no other utility in the country would be will-
ing to subject themselves to. The TVA Title in H.R. 3406, creates a model where
TVA would be required to renegotiate its current contracts with all of its customers
inside the Valley in order to bring about wholesale competition. Furthermore, with
respect to sales outside the Valley, this title prohibits TVA from selling to any retail
customers outside the Valley, and allows only the sale of excess power to wholesale
customers outside the Valley.
TVA has been in the process of preparing for competition for several years. As
I mentioned earlier, we have reduced debt by $2.4 billion over the past four years,
while reducing the interest burden of our debt from a high of 34 percent of our costs
in 1997 to the current rate of 23 percent. Additionally, we have been paying debt
down while making significant upgrades to our transmission system to ensure reli-
ability, adding peaking generation to our system, and installing significant emis-
sions control equipment at our fossil plants across the Valley. All of these things
add up to better service to our customers. We continue to believe that when com-
petition arrives in the Valley, we will be the low-cost choice for our customers.
Customer service has been a core component of the process of developing the con-
sensus title. To this end, in addition to internal preparation for competition, we are
also in the midst of discussions with our customers about the future. We have of-
fered distributors of TVA power a 10-percent partial-requirements contract and a
shorter-term contract. In doing so, we hope to promote a new relationship with our
customers through innovation and flexibility. Moreover, while some distributors are
seeking shorter-term contracts, others would like long-term contracts with more
price stability and rate security. The needs of our customers are diverse. By working
closely with distributors and knowing what each distributor plans for its future,
TVA can best serve the Valley in the competitive future.
I would like to share several basic principles that we believe are necessary, with
respect to the TVA Title, as this subcommittee moves forward: (1) that TVA legisla-
tion affirms TVAs responsibility for the integrated resource management of the
Tennessee River and economic development; (2) ensures the availability of afford-
able electricity for rural and fixed-income consumers in the Tennessee Valley; and
(3) ensures the continued reliability of the power supply and the transmission sys-
tem.
CONCLUSION
TVA is working hard to prepare for competition by reducing our debt, keeping our
electric rates low, and efficiently managing the Tennessee Valleys integrated re-
source system. I want to assure all of you that TVA will continue to work coopera-
tively with Congress and the people of the Valley to ensure that restructuring is
done in a way thats fair to TVA, to the ratepayers, to our distributors, to taxpayers,
and that it enables us to set the standard for public power in the future.
We have worked with many stakeholders, especially TVPPA and TVIC, to develop
a regional, common sense approach to restructuring. I am very proud of the progress
50
we have made at TVA, and I have never been more confident that the Valleys fu-
ture is bright. I hope to continue working very closely with this Subcommittee, and
I applaud you all for your insight and leadership. Furthermore, TVA and the Ad-
ministration look forward to working with Congress on the legislative provisions in
Title V dealing with TVA. Thank you again for the opportunity to appear here
today, and I look forward to answering your questions.
Mr. BARTON. Thank you, Mr. Chairman. The Chair recognizes
himself for 5 minutes for questions.
There is never going to be a good time to comprehensively try to
change an industry that is as integral to our Nations economy as
the electricity generation, transmission and distribution industry,
because there are always going to be vested players with status
quo special interests that they wish to protect. So there comes a
time you have to hold a number of hearings, and then you have to
look at all the record and put your best team on the field, so to
speak. And that is what the latest bill is, H.R. 3406.
Let me say with regard to Enron in that the bill that the sub-
committee passed last year Enron opposed. The only CEO I have
ever thrown out of my office was the CEO of Enron, Mr. Jeff
Skilling, because he came into my office last year and basically told
me what was going to be in the bill or else, and I said, or else,
and he was asked to leave. Now, we later had some substantive
discussions, but if anybody thinks that Enron can dictate what this
subcommittee does or what this subcommittee chairman does, I
have got a bridge in Brooklyn that I want to try to sell you, be-
cause that just does not happen.
And I can also say with regards to what happened at Enron that
it is amazing to me that the largest player in making the market,
Enron Online was the largest market maker for wholesale elec-
tricity, and I think I am correct in saying for natural gas too, al-
though I may be incorrect in that, that it was larger by orders of
multiples. The day after Enron Online went blank there was no en-
ergy price spike, there were no shortages of electricity or natural
gas anywhere in this country.
And if you think about that, if you were in a town that had two
grocery stores, or maybe three grocery stores, and one was a little
Mom and Pop on the corner, and the other one was one that had
just come into town, and the other one was one that dominated the
market and had 70 percent of the market, and that grocery store
shut down. People would probably not have food the next day in
certain parts of that community. That did not happen when Enron
went belly up. The market worked. Power was presented and the
prices didnt spike and life went on.
So I dont think that this is a hearing necessarily going to be
dominated by what happened at Enron. Enron leveraged itself to
the hilt and engaged in some accounting practices that were very
questionable, to say the least. And we have investigators looking
at those, as does the Financial Services Committee. So if there are
corrections to be made because of what happened at Enron, so be
it, but that does not take away the need to create a national elec-
tricity system that is based on open markets that are accessible to
all.
Now let me ask a few questions to our distinguished panel. Does
everybody on the panel support the position in the bill that every-
body, whether they are an IOU, a muni or a co-op, if they are en-
51
gaged in the interstate transmission, has to be a part of an RTO?

Is there anybody that opposes that? Okay. Nobody is saying any-
thing, so the Chair is going to say they are all looking at me like
they at least accept it if not support it.
Mr. MCCULLOUGH. Mr. Chairman, TVA believes that the concept
of a Regional Transmission Organization in the Southeast is desir-
able, and we pledge to work cooperatively with this subcommittee
toward that concept in a way that is fair to our ratepayers, our dis-
tributors and our bond holders.
Mr. BARTON. Well, the bill does make all Federal power adminis-
trations, including Bonneville and TVA, FERC jurisdictional for
interstate transmission rates.
To my four commissioners, the pending bill requires that RTOs
be up and functional 1 year after date of enactment. I am told that
the pending proposalsand I dont want you to comment nec-
essarily on any specific proposalbut that the proposals on RTOs
that are currently before the FERC those are in sufficient shape
that within a year after passage of this bill, if we maintain the cur-
rent language, we could have RTOs up and functioning. Do you all
agree or disagree with that?
Mr. WOOD. Chairman Barton, I would agree with that.
Mr. BARTON. You would agree. And the other FERC commis-
sioners all agree with that.
We have a title in this on reliability, which several of the com-
missioners, I believe, in your writtenand I know the Deputy Sec-
retary of Energy, in his statement, said is an improvement over the
past bill. Would the FERC commissioners wish to comment on the
reliability title of the bill?
Mr. MASSEY. I think it is a good title, Mr. Chairman. I think you
ought to enact it.
Mr. BARTON. Oh, well, I appreciate that.
Ms. BREATHITT. I support it and said so in my testimony and
didnt have any recommended tweaks or changes.
Mr. BARTON. Okay. I have got 12 seconds left; I want to ask some
questions later in the hearing, if we have time, about the FERC
order on market power and the ability to set market prices. I have
had a phone conversation with Chairman Wood about this. I read,
I believe, the dissenting opinion that Commissioner Breathitt had
when that order came out. I share some of Commissioner
Breathitts concerns about it. It would seem to me that we would
not want to penalize a market maker or a market provider before
there has even been a complaint of market power.
And as I understand the order, just the fact that you have
enough reserve capacity so that if your reserve capacity is larger
than the peak power demand, you are deemed automatically to
have market power and to have used that market power. And to
me that is a little bit like being convicted before there has even
been a crime committed. So I have got some concerns about that.
I would let Chairman Wood comment briefly, and then I am going
to have to go to Mr. Boucher, because my time has expired.
Mr. WOOD. Thank you, Chairman Barton. The supply margin as-
sessment test that we adopted following discussions we had since
the first day I was on the Commission, I think all four of us and
our prior colleague, Curt He bert, recognize that the tests that we
52
were applying to market-based rate authority, which is in effect a

deregulation certificate, in light of the California history and the
need for the Commission to do what I would characterize as a pret-
ty dramatic response to that, is to make sure that this never hap-
pens again.
There is a balance between having a totally deregulated market,
which is what we had in the West, and the need to do what we
had to do on June the 19th, which was put a mitigation plan over
the top of every single player in the entire western half of the coun-
try. We were looking for something, or I was, certainly, looking for
something much more surgical than that, that would not be an
after-the-fact response but would in effect look at who has the abil-
ity to exercise market power, allow them to make the money and
to make, in the formula that we adopted, sufficient money, but not
allow them to go above a cloud of reasonable rates, which we are
required under the Federal Power Act to maintain a zone of rea-
sonableness for rates in advance.
It is not a conviction of something, they are not being punished
for something, but we identify people who because of their size in
a relevant market have the ability to actually control the price of
that market and say you can do so much but not more than that.
It is to me an example of what I would hope any Federal agency
would do: get through the crisis and then look at what could in fact
be a more focused and surgical solution toward making sure that
crisis never happens in any other part of the country again.
So with the 1,200 people who have deregulation certificates,
there may be a few, as they come back through the Commission,
that because of their size are going to be subject to the supply mar-
gin assessment test. But I think that is a pragmatic response to a
situation that we want to ensure never happens again, because
customers do not need to go through what they went through in
the West again.
Mr. BARTON. Well, put me down as undecided.
Mr. WOOD. Okay.
Mr. BARTON. And we will continue to dialog on this. But the
chairman would recognize the distinguished ranking member, Mr.
Boucher, for 5 minutes of questions.
Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I wel-
come this opportunity to have a conversation with the distin-
guished members of the Federal Energy Regulatory Commission
about a number of the provisions that are contained in the legisla-
tion now before us. I apologize for being absent while you made
your statements. You may have actually answered some of the
questions I will propound. I had to attend briefly a hearing in an-
other committee, the name of which is rarely ever mentioned in
this committee, but I do apologize. It shall not be mentioned here.
I apologize for being absent.
I am interested in your views on these matters, so let me just
ask all of these questions at one time, and you can respond to those
questions that you choose to respond to as a group. First of all, I
am interested in your view with regard to a continuation of the
FERCs merger authority. I suspect you have definite views on this,
and I would welcome those views. I happen to think that if we re-
peal your authority simultaneously with repealing the Holding
53
Company Act, all of the inevitable consolidation in the industry

that will occur in the wake of that will produce enormous market
power concerns, and you would then be perhaps powerless to ad-
dress those if you didnt have merger review authority. So your re-
sponse to that would be welcome.
As a second matter, I am interested in your response to the pro-
visions in the bill that would prescribe the way in which investor-
owned utilities and others who own transmission become members
of Regional Transmission Organizations. It strikes me as a rather
detailed prescription, and your response to those particulars would
be welcome. It may be that you would prefer a simple statement
in the legislation clearly confirming your authority to regulate RTO
membership, and if that is the case, I hope you will tell us.
As a third matter, the bill contains provisions on incentive pric-
ing for the construction of new transmission, and my question to
you is whether that is appropriate, in your opinion, or as a possible
alternative should we specifically empower, or can you empower,
Regional Transmission Organizations to bid out that construction,
to manage the construction and in some way through its own
mechanism to achieve the goal of having new construction built in
those parts of the country where new construction is required. And
so your view with regard to incentive pricing and the alternative
of simply having the RTOs undertake the job of bidding out the
new construction would be welcome.
And, then finally, I would like to have your view with regard to
the language in the proposed statute that relates to uniform inter-
connection standards. I know that you have a notice of proposed
rulemaking out on that subject. Do you believe that you have suffi-
cient statutory authority to adopt a standard? Do you need addi-
tional authority? And what is your reaction to the provision in the
bill that addresses uniform interconnection standards? Mr. Wood,
would you like to begin?
Mr. WOOD. Yes, sir, Mr. Boucher. In brief, the merger authority
issue, I probably dont have as strong a feeling on that as my col-
leagues do. I think I share their general direction, but I also recog-
nize that we are the only agency in the government that does that.
If you want that issue to continue, then it probably should be stuck
in someone elses statute that they should have the duties that we
have, if there is a concern about inefficiency in government there.
I do think in just the brief time I have been on the Commission,
we deal with mergers rather routinely in 90 days. There are a few
examples of those that are very slow but certainly nothing like the
FCC that I know the committee has been concerned with in the
past.
The consolidation that will happen in the industry as a result of
mergers, combined with the RTO provision, and consolidation of
companies that transmit and stay regulated are probably not a big
concern; in fact, it probably will happen to recognize the economies
of scale. Consolidation of generation owners within a given market,
yes, that would be a market power concern. Quite frankly, our tests
that I just discussed briefly with Mr. Barton would, in effect, limit
those companies ability to exercise that market power as it works
today. But there are two things going on there.
54
RTOs, I think that looking through those provisions, and there

was some language there, but the main thing that when you look
at successful models in the country that have set up wholesale
markets that work is it is not just a transmission-owning company
game. They have the assets, but there are a lot of people that play
in that market, and the most successful models, the ones here on
the East Coast, the one in Chairman Bartons and my home State,
and others around the world, did start very broadly from a broad
stakeholder participatory effort. And I think that the way some of
the language goes, and I mention this in my testimony on RTOs,
is a bit more focused on the right of the transmission owner to stop
something, to slow it down in court, et cetera, recognizing that
there are a lot more people here than just the transmission owners;
it is a wholesale market we are talking about.
Mr. BOUCHER. So you would prefer not to have that language in
that statute.
Mr. WOOD. Again, I think the confirming of the Commissions au-
thority, as Chairman Barton outlined, is helpful. It was just re-
affirmed yesterday that order 2000, which made it a voluntary ef-
fort, was just reaffirmed by the local court here in the D.C. Court
of Appeals.
Mr. BOUCHER. Well, let me ask you the other side of the equa-
tion, though. Do you see anything in the statutory provisions, the
proposed provisions in this bill, that might restrict your authority
to take the kinds of steps that you are currently taking with regard
to RTO membership?
Mr. WOOD. Yes, and those are what I specifically mentioned in
my written testimony. So I could go through those, but, by and
large, certainly the haste to get into an RTO is a positive. I think
we are getting there, but, certainly, you never know until you actu-
ally get it stuck in the sand that you are there. And the nailing-
down of some contours in what ought to work is positive but in
some cases could be a little more detailed than we may need 5
years from now, because these will morph over time into institu-
tions that address the needs of their customers and of their owners.
And so my only concern is just a general statutory legislative type
concern that very specific language, while it may work today may
5 years from now be difficult. But that is not a critical at-the-
heart concern.
Incentive pricing, requiring bidding out, we havent discussed
this as a body, but I certainly would intend that it be an option
out there that should be employed anyway to ensure that the best
product for the least cost is what we get in these systems.
Mr. BOUCHER. On that note, do we need to do something statu-
torily to authorize the RTOs to undertake bidding out, or is this
something that their basic charters could empower them to do?
Mr. WOOD. Well, I think the basic charter of the RTO could. If,
however, you are in conflict with a State statute that says only a
regulated utility can build a power line, as opposed to a merchant
that may want to come in and invest in a power line to fix a
constraint
Mr. BOUCHER. So some provision that affirmatively empowers
RTOs to bid out would be a helpful measure.
55
Mr. WOOD. And also follows through and says if you are in fact
the winning bidder, that you have a right to move forward under
perhaps some Federal authority to build that line. Then that, of
course, ties back into the siting issue, which I know is quite deli-
cate and I think was addressed pretty delicately by the bill.
And your final provision was uniform interconnection standards.
Yes, we are moving forward on uniform interconnection standards
with regard to the larger power plants. But as I mentioned in my
opening statement, what the Barton bill does that we cannot do is
really allow a broad national template to be laid for the small dis-
tributed generation that I really think is a big part of our Nations
energy future.
Mr. BOUCHER. And you would like to be able to do that.
Mr. WOOD. Well, I think we or the Department or somebody
thatwhen I was at Texas, the Department gave the State a pret-
ty nice grant of R&D money to actually get consultants to draft
those standards. So the State of Texas has them. I understand that
California and New York have similar although not exactly the
same standards. And we could do a 50-state kind of approach to
this here or you could have a very investor-friendly, kind of heres
how it works in America approach on distributed generation, which
this bill would do. It would have the standards set nationally and
implemented by the States.
Mr. BARTON. We can possibly do a second round if members
wish.
Mr. BOUCHER. Well, thank you, Mr. Chairman. I realize this has
taken a great deal of time. This is a helpful conversation, Mr.
Wood. I thank you for those answers. And in a second round, I
would like to get the response of the other panel members to that
same set of inquiries. Thank you, Mr. Chairman.
Mr. BARTON. Gentleman from Tennessee, Mr. Bryants recog-
Mr. BRYANT. I thank the chairman. I would like to direct two of
my first questions to the director of the TVA Board, Glenn
McCullough. The first one, and I will give you the question and ask
you to answer it, and then I will ask you another question after
that. Keep that in mind as you answer from a timing standpoint.
One of my biggest concerns is the continuation of reliable and af-
fordable electricity to my constituents and to the people of Ten-
nessee. Would this language in this bill do anything to jeopardize
those issues of reliability and affordability?
Mr. MCCULLOUGH. No, Mr. Bryant; in fact, the consensus title
language that is in tact in H.R. 3406 we believe is the best lan-
guage to ensure affordable, reliable power for the people of Ten-
nessee Valley and also to have a competitive, transparent market-
place.
Mr. BRYANT. Okay. My second question would be could you ex-
plain in some detail, if you would like, to this subcommittee some
of the ways in which TVA and the distributors, the 158 customers
plus, I guess, the direct-buy customers for that matter, how TVA
has been preparing for the eventuality of a restructured electricity
marketplace?
Mr. MCCULLOUGH. Yes. Mr. Bryant, TVA is offering partial re-
quirements contracts to our 158 power distributors. In other words,
56
we are saying to the power distributor, You can look into the mar-
ket, you can self-generate, you can go with an independent power
producer. We recognize that an open marketplace offering competi-
tion and choice is desirable, and TVA wants to embrace that sort
of marketplace. So the consensus title language enables distribu-
tors to buy power from another supplier. With 2 years notice, they
can buy 10 percent of their requirements, and now they are under
full requirements contract. With 3 years length of notice, they
could buy all their power from another provider.
Second, the language in the consensus title, which is contained
in this bill, yields to FERC on oversight of transmission. That is
a compromise, but we trust the judgment of FERC on oversight of
transmission tariffs. And we feel like that that again demonstrates
TVAs willingness to embrace a competitive and open marketplace.
Third, the merchant plan activity in the Tennessee Valley is vi-
brant and brisk. Many independent power producers are interested
in locating in the Valley. There is an abundance of natural gas
pipelines. We go through the FERC-ordained procedure to enable
them to access our transmission grid to deliver power to a place
where it is needed. So TVA is working cooperatively in compliance
with FERC, with the ordained procedure for independent power
producers to access our system, and, again, we think that that is
in line with the energy security needs of the country.
Those are three ways that we are embracing competition and
choice, and that language is contained in this bill.
Mr. BRYANT. Thank you. Let me ask one question to Mr. Wood,
if I could, regarding transmission siting, which is an always an
issue to me in terms of a States and individual rights versus ef-
forts by government, whether it be, again, a State government or
Federal Government to site over somebodys private property. And
there is a balance there. I would ask you to describe FERCs au-
thority to site, in this case, natural gas pipelines. Is it the same
broad authority necessary to effectively site interstate transmission
lines? And what do you see on behalf ofor at least chairman of
FERC, the right balance between State and regional concerns as
well as individual concerns?
Mr. WOOD. Thank you, Mr. Bryant. I am probably not the strong-
est advocate for Federalizing this particular issue, as you might
find either at the table or in the administration, but I think, hav-
ing been a State commissioner, in fact, I am just filing an affidavit
today in a lawsuit that I am still being sued for for putting a trans-
mission line in South Texas, so I remember these responsibilities
well and have to say from a personal level I would rather they not
follow us up here to DC. But in the purpose of balancing what is
in the best interest of the public, I would say largely, in my experi-
ence, the States have been able to address these issues.
The one instance I mention in my testimony where there might
be a concern is if a State statute, which is not the same one I had
to deal with but I understand is true in about 10 or so States, says
that you have to show there is a local benefit for the placement of
a transmission line. If that transmission line is meant to bring up
the voltage of the entire grid but you may be at the corner of a
State, it may be difficult to say that the residents of that corner
of Tennessee, in fact, are benefiting from the placement of this line.
57
That may be more for the benefit of Kentucky. But yet that is an
approval that is required by the State of Tennessee. So the regional
aspects on the regional lines really would probably be the area
where there is a problem.
On the addressing lines that rest largely within a single State,
I cant say I have heard of any problem with that. It is when you
have got regional lines. And I would suggest, as I mentioned in my
testimony, that these Regional Transmission Organizations, which
are made up of multiple States, their commissions, some oversight
by FERC, by all the participants in those regional markets, that a
proper procedure may be to put it not at the Federal level, but at
the regional level to look at what the best siting is. The Western
Governors have set a good template in fact for how that ought to
work and that I have kind of been on record of being a pretty good
fan of.
Mr. BRYANT. Mr. Chairman, I think my time has expired.
Mr. LARGENT [presiding]. Yes, sir; your time is expired. I recog-
nize the gentleman from Tennessee, Mr. Gordon.
Mr. GORDON. Thank you. Chairman McCullough, since you
seemed to be up to bat a little earlier, I will return to you. As you
know, the Tennessee Valley Authority was created to help control
the flooding that was devastating to a large region of the country,
as well as to help with economic development to one of the poorest
regions of our Nation. And with that, there was a Federal invest-
ment. Three years ago, Congress has mandated there will be no
more Federal dollars appropriated for the Tennessee Valley Au-
thority. Not only that, but the TVAs continuing to pay back that
original investment, millions of dollars to the Treasury every year,
which is appropriate, an agreement that was made.
I guess one thing that concerns me is that every river in the Na-
tion the management is paid for by the Corps of Engineers except
for the Tennessee River, which is underwritten by the ratepayers
in that area. So it appears that not only is this a misconception
that somehow there is a Federal appropriated subsidy to TVA not
accurate, but TVA really is having to take up additional respon-
sibilities that taxpayers take care of elsewhere. Would you want to
comment on that if I am correct or not?
Mr. MCCULLOUGH. Well, Mr. Gordon, you are correct in every
point you make. I would emphasize that while TVA does not re-
ceive any Federal appropriations, we have not in any way neglected
our responsibility to manage and develop the Tennessee River and
its tributaries. Appropriations, I believe, is your prerogative and
the leadership of Congress, as far as TVA is concerned. We are
committed to running TVA like the big business that is it, being
held accountable to you and your colleagues here on the Hill. In
fact, we benchmarked our performance in terms of water quality,
in terms of navigation, flood control.
And you are exactly correct, in 1933, the Tennessee River was
out of control, and the Tennessee Valley was flooded almost every
year. That has not been the case since the dams and the reservoirs
have been constructed. Not only that, we have affordable, reliable
power in the Tennessee Valley. And the Tennessee Valleys econ-
omy has grown significantly, providing better jobs for the people of
the Tennessee Valley.
58
Mr. GORDON. You had mentioned earlier in your testimony about

some of the model environmental programs you were doing. Once
again, these are programs that are underwritten by ratepayers, yet
they are modeled for the entire Nation. Can you talk some more
about those environmental initiatives?
Mr. MCCULLOUGH. Yes. We have significant water quality initia-
tives and amebas hydro and oxygenization program in our hydro-
electric facilities to ensure that the water quality in the Tennessee
Valley is among the best in the country. We are working very close-
ly with State and Federal oversight authorities to ensure that the
wateras a matter of fact, over 4 million people get their drinking
water each day from the Tennessee River. TVA has a mandate to
ensure that it is of the highest quality. We are working on other
initiatives to modernize and in fact to generate more
hydroelectricity and at the same time have a higher quality of
water. And we are doing it all without a penny of federally appro-
priated dollars. We think it is our reason for being, it is our mis-
sion, and we think it is a responsible way to run the business. But
you are correct in the points you make.
Mr. BRYANT. Thank you.
Mr. MCCULLOUGH. Yes, sir.
Mr. LARGENT. Does the gentleman yield back?
Mr. GORDON. Yes. I yield back the balance of my time.
Mr. LARGENT. Mr. Shimkus from Illinois is recognized for ques-
tions.
Mr. SHIMKUS. Thank you, Mr. Chairman. Mr. Blake, two quick
questions, then I have a question for the commissioners. Does the
administration support the inclusion of currently non-FERC juris-
diction transmission owners into RTOs?
Mr. BLAKE. Yes.
Mr. SHIMKUS. And based upon the Presidents national energy
policy, do you think that the Barton energy draft meets the intent
of the administration when they presented their national energy
policy?
Mr. BLAKE. I think it is definitely in line with the administra-
tions desire for comprehensive electricity legislation.
Mr. SHIMKUS. Thank you. For the FERC commissioners, I am in-
terested in this seams agreement issue, and especially for the State
of Illinois in which we currently have three RTOs or we may have
three RTOs. We understand that the cost of getting electricity into
ones home may be 5 to 10 percent of the cost per kilowatt hour.
As someone who is concerned about the competitive benefits to the
individuals in my State, can you talk me through the seams agree-
ment, and are there things that we need to do to address this? To
tell you the truth, I am kind of confused by the whole issue. And
why I dont just go with the chairman and then go from my left
to my right? Thank you.
Mr. WOOD. Yes, sir; let me jump in first. These are all pending,
actually, I just posted the agenda for next Wednesday for our Com-
mission, in which we will take up the seams agreement, among
really a litany of issues relating to the structure of the wholesale
market in the Midwestern United States. So I think I might defer
to Linda and Bill, who were there actually when the seams agree-
ments were first voted on, for giving you some specific answers.
59
Mr. SHIMKUS. That is great. Commissioner Breathitt?

Ms. BREATHITT. I need to speak generically about this, because
there is a particular seams agreement that was worked out be-
tween two parts of the Midwestern area of the U.S. But seams are
going to occur between RTOs. And the purpose of working out
seams agreements between RTOs is to minimize the flow of elec-
tricity between the seams. So the protocols dont impedethe pro-
tocols that one RTO has dont impede the flow of electricity from
one region to the other, from two different RTOs.
So that is one way to address the ability for power to flow from
one to the other is through a seams agreement that might address
procedures and protocols or rates even, or congestion bottlenecks.
So they can address those very important aspects, and that is what
I think will be important for us to make sure our agency encour-
ages, because you are going to have a number of RTOs within the
United States.
Mr. SHIMKUS. If I could follow up. A good seams agreement,
could that help forestall some market power abuses? Could there
be market power abuses because of poor seams agreements and the
like?
Ms. BREATHITT. Market power abuses can occur whether you
have a seams agreement or not, and those need to be dealt with
through a number of ways. But a seams agreement, per se, may
not directly address market power. But what a seams agreement
can help minimize is the inability for power to flow easily between
regions and markets.
Mr. SHIMKUS. Commissioner Massey?
Mr. MASSEY. Mr. Shimkus, a couple of years ago, when this issue
came before the Commission, the question was whether we should
encourage a seams agreement in the Midwest or encourage the for-
mation of a single RTO. And my vote
Mr. SHIMKUS. And we are still debating that.
Mr. MASSEY. Yes. Well, my vote at that time was in favor of a
single RTO for the Midwest. However, a seams agreement can be
a good thing. It depends on how well it is enforced and how well
it is complied with. I think it can help to mitigate market power.
I think it can ensure that power flows freely across the seam with-
out trading difficulties. In particular, it can help deal with the crit-
ical issue of how to manage congestion on the grid. But I think a
better solution in many parts of the country is simply to ensure
that the RTOs are appropriately sized to start with.
Mr. SHIMKUS. Mr. Chairman, my time is expired, and I will quit
my questions.
Mr. LARGENT. Yes. Mr. Sawyer from Ohio is recognized.
Mr. SAWYER. Thank you, Mr. Chairman. I just want to observe
that these exchanges I think have been extraordinarily helpful, and
I am particularly grateful that we took the time to have these hear-
ings this week.
Let me touch on a couple of observations that you made, Chair-
man Wood, and one that I made. The first is that even at a time
when transactions and generating capacity has beenor invest-
ment has been growing, the transmission really has been in a very
long, slow decline. It seems to me that that is the single most de-
60
bilitating impediment to achieving the goal that we are all talking

about here.
At the same time, in your testimony, you suggested that infra-
structure investment suffers from the uncertainty of the long tran-
sition to competitive wholesale electricity markets. I am inclined to
agree with that. Can you talk to me briefly, or other commis-
sioners, about the steps that have been taken to increase the cer-
tainty and what steps you need from us to help you achieve it? I
would be happy to hear from other commissioners as well.
Mr. WOOD. A great question. In 1996, the Commission in what
was called Order 888, put down the firstI guess the first book of
the trilogies and said, We are going to open these wholesale mar-
kets. That now was argued before the Supreme Court shortly after
the attacks, and we expect a decision on that in the spring. Order
2000, which was the step that was taken in late 1999 says, Not
only are we going to fix this on a utility-by-utility specific basis, but
we want to encourage the development of regional groups that look
at electricity on a regional basis, which most people acknowledge
makes a lot of sense. So that was actually affirmedthat order
was affirmed yesterday by the D.C. Court of Appeals.
So now we are implementing those two orders of the Commission
on a utility basis and on a regional basis, and so those steps are
going forward. They are tediously slow, from my perspective. Inves-
tors, I know would look for somewhere else until these rules got
clarified. That is why we have now announced that we are going
to finish the trilogy with the third book, which will be saying not
only do we want these things and we think they are a good idea,
but here is what we specifically want them to do, so that investors
know these are the rules of the road for investing in a transmission
business from now for 10 years.
We were at Wall Street last week. I heard that message in
spades, even in the post-Enron
Mr. SAWYER. We have as well.
Mr. WOOD. Yes.
Mr. SAWYER. What do you need from us to help you facilitate this
and move
Mr. WOOD. Yes. And I am sorry I didnt put this in my testi-
mony, because it is an idea that I actually heard in discussions
from an exasperated participant in these markets, that no matter
what the committee does by adding incentive rates to the legisla-
tion or the Commission does to pull it all together, at the end of
the day, the bulk, say 90, 80 percent of the revenues that a trans-
mission company would spend would be ultimately paid byor
would be paid by a ratepayer that is retail-regulated by our col-
leagues at the States. The split jurisdiction betweenwe have ju-
risdiction over some of the transmissionover all the transmission
access, some of the transmission ratesencouraging transmission
to be built, with the States collecting 80 percent of the dollars, they
may not agree that it gets built.
Mr. SAWYER. Could we just have a quick commentary from other
commissioners?
Ms. BREATHITT. I think this is something that our agency can do
and you asked for something that Congress could do, but may I
spend 30 seconds on that?
61
Mr. SAWYER. Sure.

Ms. BREATHITT. State returns are often a couple or several hun-
dred basis points over Federal returns on transmission. One thing
that the FERC can do is make those more comparable so it incents
transmission owners or transmission companies to build.
Mr. SAWYER. Others?
Ms. BREATHITT. We have heard that.
Mr. SAWYER. Other comments?
Ms. BROWNELL. I would simply add that I think we could clarify
with one simple statement or authority to establish RTOs. I agree
with my colleague on incentive rates, but you need to give incentive
rates to innovators, not for people to continue their jobs the way
they have always done them. Because that will bring the changes
that you talked about.
Mr. SAWYER. Commissioner Massey?
Mr. MASSEY. I believe that you are moving in the right direction
in placing transmission under one set of rules. I think that is criti-
cally important. Right now about 30 percent of the grid is exempt
from the open access requirements directly. No. 2, I do think it is
important for Congress to make a statement about RTOs and their
importance to evolving regional markets. It would be helpful to
have a clear statement from Congress that we can insist that these
institutions be formed. Otherwise we may continue to have a
patchwork because a particular State may, for example, have its
own statute that says you cant transfer control of any transmission
assets in this State or any assets at all without the approval of the
State Commission. And if they withhold that approval, we may still
have a patchwork in some parts of the country. So I think it needs
to be clear that the Federal entity that is responsible for regional
markets can get this done. And, No. 3, I think we do need manda-
tory reliability rules.
Mr. SAWYER. Thank you for your flexibility, Mr. Chairman.
Mr. LARGENT. I recognize the gentleman from Oregon, Mr. Wal-
den.
Mr. WALDEN. Thank you very much, Mr. Chairman. I want to
thank the chairman of the subcommittee specifically for working
with us for the inclusion of a Northwest title, because similar to
my colleagues from Tennessee and who are representing the Ten-
nessee Valley Authority, the Northwest is indeed unique in its
power system and the way it operates and how we are working to-
gether to form regional RTO out there. So I appreciate the sub-
committee chairmans work with us on inclusion of that title.
There was a little present associated with that section of the bill,
however, that I hope to work with the full committee chairman on,
and that is the section 525 language that deals with continuation
of preference power for the DSIs in the Northwest. They have been
under enormous pressure of late because of power costs and yet
represent 40 percent of the Nations supply of aluminum and are
important employers in the region. My concern is that this inclu-
sion may indeed blow up talks that are ongoing right now in the
region, and so I draw the committees attention to that.
I wanted to follow-up a little bit on FERCsthe language in Sec-
tion 401 that would expand oversight over transmission networks
on reliability and support. And I wonder, some of the comments I
62
have received indicate that FERC already has that authority to ap-
prove incentive transmission rates that are just and reasonable. Do
you feel you need this additional authority?
Mr. WOOD. Sir, it wouldnt hurt. I think a lot of things that were
not written in the 1992 law or in the 1935 law are subject to being
challenged by court, and my experience certainly at the State level
if issues related to ratemaking are not clear enough from the stat-
ute, they certainly become litigation targets. And if Congress
deemed that this is a good goal, and I would agree that it is a good
goal, then it would be helpful to put that in the statute, clearly
that authority is here.
Mr. WALDEN. Do you feel that it will result in construction of ad-
ditional transmission facilities? I mean is there a guarantee that
comes with this for consumers?
Mr. WOOD. No, no, no. I think as with ratemaking in general,
you give somebody sufficient revenue, sufficient return, you have a
high expectation that they will deliver on that but no guarantee.
Mr. WALDEN. One of the other concerns would come out of Sec-
tion 101 of the bill, the interconnection standardsand this may
have been addressed in some earlier discussions I think my col-
league from Virginia raisedabout whether FERC has the tech-
nical expertise to set some of these very technical standards. How
would you go about that? Are you going to rely on the IEEE stand-
ards?
Mr. WOOD. The current process that we have going on now is
very much a collaborative effort with the industry, with, quite
frankly, the Commission staff playing a catalyst and shepherding
role, getting the experts together on talking about issues of this na-
ture. It is clearly the right way to go forward. IEEE standards
I know from having done this back in my home State, IEEE stand-
ards fill a lot of that effort, a lot of the contract revised back on
the industry standard setting bodies to that, which is referenced in
the statute.
Mr. WALDEN. I think that is all the questions I have at this time,
Mr. Chairman.
Mr. LARGENT. Okay. The Chair recognizes Mr. Markey for his
questions.
Mr. MARKEY. Thank you, Mr. Chairman, very much.
Mr. BARTON. Would the Chair suspend just a second? This will
be our last questioner before we go, because we have six votes. So
we will do Mr. Markey, and then we will recess, and then we will
come back at approximately four oclock. I dont see how we can do
six votes in less than that time.
Mr. LARGENT. Mr. Markey is recognized.
Mr. MARKEY. Thank you, Mr. Chairman. It seems to me that the
Enron collapse raises some fundamental questions about the na-
ture and the adequacy of oversight over the traders who are mar-
keting electricity. If in fact the transactions that are now raising
eyebrows wee intended to conceal trading, our investment losses,
what does that say about whether we can continue to allow these
energy trading firms to be completely unregulated? When it comes
to banks, security firms and commodities markets, we have Federal
regulators in place that have holding company, risk assessment au-
thorities, authorities to set capital standards and margin rules,
63
audit trail and recordkeeping authorities, large trading or large po-

sition reporting requirements, and anti-fraud and anti-manipula-
tion authorities, backed up with market surveillance systems and
enforcement powers.
But when it comes to electricity trading, we really dont seem to
have that type of regulatory infrastructure. Dont you think, Mr.
Chairman, that we should put such a regulatory structure in place
so that we can make sure that any future potential Enron collapse
is much less likely to ever occur.
Mr. WOOD. Thank you, Mr. Markey. One of the major features
of the RTO rule that was just affirmed yesterday by the D.C. Court
of Appeals is that we have a market monitoring section that looks
at the regional transactions on a hour-by-hour, minute-by-minute
basis. We have the ability now certain in the Northeast and your
area, as well as on down through here, with our oversight of the
markets that have already been organized up here. So you monitor
transactions on atransaction-by-transaction basis and we do.
That information is valuable, it is very helpful. The fact that the
local monitors and at the Commission are looking at that, and on
occasion acting on that information is very helpful. We do not have
the capability across the entire country, because quite frankly the
markets across the country are not that organized. It is difficult
without an organized market to have much oversight of a lot of dis-
parate activity.
Mr. MARKEY. What is your authority to regulate a non-utility
electricity trader like Enron?
Mr. WOOD. Well, they, actually, under the act, would be consid-
ered a public utility. The way that the utilitiesthey dont own the
wires in this, but they have a marketing certificate just as I have
discussed with some other questions earlier. There are 1,200 people
that have market certificates
Mr. MARKEY. So you believe you have existing authority.
Mr. WOOD. We do, and in the past we have waived our account-
ing requirements for the last 10 years of these unregulated parties,
because we dont set their rates. The main reason we have account-
ing requirements is not to protect sophisticated players in the mar-
ket, but to protect the customers.
Mr. MARKEY. So what are you going to put in place post-Enron?
Mr. WOOD. We just posted this afternoonthis morningour
agenda for next week, and we were taking up an item which inter-
estingly was work already going on to reflect the changes in ac-
counting for derivatives and for hedging instruments that we were
looking from a ratemaking point of view but we are considering
looking at that for more of a disclosure point of view.
Mr. MARKEY. Would that allow you to look at the capital struc-
ture of Enron?
Mr. WOOD. That is an open question. That would be certainly
something we would ask theit would be a notice of proposed rule-
making. So at the phase of asking in public
Mr. MARKEY. Do you have the capacity and do you believe you
have the inherent authority to look at the capital structure of these
companies, if you put such a rulemaking in place?
64
Mr. WOOD. The statutory authority, yes. The technical expertise

on our staff at present to discern that, I would have to get back
to you on that, sir.
Mr. MARKEY. Mr. Massey?
Mr. MASSEY. Well, I think we have the authority to look the cap-
ital structure. Whether we should is a matter that I am open to
argument about. We certainly have the authority to take a look at
the current exemption that we had in place, as Pat says, for about
10 years, an exemption from our uniform system of account filings
for about 1,200 power marketers and sellers, because we dont gen-
erally regulate their rates. However, we have conditioning author-
ity that we can use in reasonable ways.
Mr. MARKEY. When you say you are open, who else would do it
but you? Who would have responsibility but you? You are the ex-
pert agency in the field of energy trading.
Mr. MASSEY. Well, we definitely ought to consider what the les-
sons from this are for energy trading, and I think we will.
Mr. MARKEY. Let me justI know my time is going to run out
l just want to run down yes or no, and I would like you and the
chairman to each answer. In your opinion, do you have the power
and intent to establish, one, capital requirements? Chairman
Wood?
Mr. WOOD. I am not given enough of a question to give you a
thoughtful answer. I will be glad to do so.
Mr. MARKEY. Mr. WoodI mean Mr. Massey?
Mr. MASSEY. I think we have the power
Mr. MARKEY. Yes or no. I mean I am going to run out of time.
Mr. MASSEY. Yes, we have the power. I dont know whether we
ought to establish those standards.
Mr. MARKEY. Okay. Ms. Breathitt?
Ms. BREATHITT. Mr. Markey, we have also included in a recent
rulemaking electronic trading platforms to come in under our
standards of conduct.
Mr. MARKEY. Capital requirements, yes or no?
Ms. BREATHITT. I havent studied that, but I
Mr. MARKEY. Okay. That is fine. I think you should study it.
Next
Ms. BREATHITT. I have the intent.
Mr. MARKEY. The intent, that is good. I just need youmargin
requirements, yes or no?
Mr. WOOD. Same answer.
Mr. MARKEY. Answer is?
Mr. WOOD. I will get back to you.
Mr. MARKEY. Okay. Ms. Breathitt?
Ms. BREATHITT. I havent looked at it, but I would have the in-
tent to do it if we can.
Mr. WOOD. If we have the authority, I am willing to look at it.
Mr. MARKEY. Ms. Brownell?
Ms. BROWNELL. I think it is important we work with other finan-
cial oversight agencies to make sure that we having a coordinated
appropriate response, which would include, Congressman Markey
asking these questions. But in many cases, from what we have
seen, these are financial issues, so I just want to make sure that
the right agency is looking at the right thing.
65
Mr. MARKEY. They are exempted from many of those other agen-
cies regulations. I mean you wont be responsible. Auditing and
bookkeeping requirements?
Mr. WOOD. The answer to that is that we do have the authority
certainly on the physical delivery of the power, and that is what
I mentioned to you a moment ago that would be subject to our dis-
cussions next week in our open meeting.
Mr. MARKEY. Ms. Breathitt, very quickly, and then I am going
to
Ms. BREATHITT. Yes.
Mr. MARKEY. Yes.
Ms. BROWNELL. Yes.
Mr. MARKEY. Yes.
Mr. MASSEY. I answer the same as Chairman Wood.
Mr. MARKEY. Okay. And the large trader or large position report-
ing, so you know what is going on in the market.
Mr. WOOD. Same answer on the accounting side. Yes, sir. I think
that is certainly something that would come up next week in our
discussions.
Ms. BREATHITT. I agree with the chairmans response.
Ms. BROWNELL. As do I.
Mr. MASSEY. I agree, and I think we ought to take a close look
at that.
Mr. MARKEY. And, finally, anti-fraud and anti-manipulation rules
applicable to trading activities.
Mr. LARGENT. This will be the last question.
Mr. MARKEY. Okay. Thank you.
Mr. WOOD. I do understand that the other two agencies do have
authority over fraud issues, and I would certainly defer to their ex-
pertise on that. But if they dont I am not aware that we do have
that authority. But we will certainly look for it and I will get back
to you on that.
Mr. MARKEY. Would you want that authority?
Mr. WOOD. I think anything that diminishes customers faith in
the efficacy of markets ought to be vested in us or somebody.
Mr. LARGENT. Gentlemans time has expired. I yield to the chair-
man of the subcommittee for a brief statement.
Mr. BARTON. Before we break for the recess, I want to follow-up
on some of Congressman Markeys questions just briefly. There is
absolutely no question that the collapse of Enrons stock price has
wiped out many of their pensioners, many retirees around the
country. I mean it is a major, major calamity, and nobody is taken
away from that. Until this year, until this Congress, this committee
had jurisdiction over the financial industry also. So you had one
committee that had energy jurisdiction and also security jurisdic-
tion. And both Mr. Markey and I are very unhappy that we lost
the security jurisdiction to the new Financial Services Committee.
I am not taking away from the collapse of Enron, but in terms
of the energy markets, is there any evidence that because of the
collapse of Enron and the disappearance of Enron Online, that
power was not sent where it was supposed to have been sent? Did
the market fail in the sense of energy getting to where it was con-
tracted to go?
66
Mr. WOOD. In fact, no. No, sir. The physical deliveries of gas
have continued, and in fact I think the big story here is that the
markets really didnt hardly hiccup at all.
Mr. BARTON. So we have got an accounting disaster with Enron
and a financial reporting disaster and probably a partnership cre-
ation problem, but we dont have an energy market problem.
Mr. WOOD. No, I think energy markets performed admirably well
in the past couple of months on this issue.
Mr. BARTON. Thank you, Mr. Chairman.
Mr. LARGENT. Well, we will recess this hearing until four oclock,
and I know that the chairman of the subcommittee feels Enrons
pain.
[Brief recess.]
Mr. BARTON. If our panelists are still in the room, they could re-
sume their seats. And if we havedo we have a member back
there, anybody? It is Mr. Norwoods turn.
The subcommittee will come to order. When we recessed, Mr.
Markey had asked his 5 minutes of questions. We now go to the
majority,and Mr. Norwood of Georgia is recognized for 5 minutes
for questions.
Mr. NORWOOD. Thank you very much, Mr. Chairman. I am de-
lighted about this hearing and, as others on the committee, I am
very concerned about Federal deregulation of electricity, I am con-
cerned about its unintended consequences, and I want to take this
opportunity to see if we cant clear up some things.
It seems to me that we all ought to be a little concerned about
deregulation of electricity. We have noted the deregulation in Cali-
fornia, and the consequences of that was generally the cost to the
ratepayer. Enron, the poster boy for deregulation, right or wrong,
has ended up hurting people. And in my own State of Georgia, we
were one of the first States to deregulate gas. And though it looked
right, it appeared right, everything should have been right, but in
the end it turned out to be a very costly mistake to the ratepayers
in Georgia. So it is right and correct that we have great concerns
about this.
Now, just so you know where I am coming from, I come from the
State of Georgia. We are very happy with our utilities there. That
includes the coops, that includes the munis, that includes Souther
Company, that includes Georgia Power. And, frankly, the reason
we are very happy with them is that the give us very good service
at very good rates, and we want to be sure that the FERC doesnt
do anything that it might help somebody else but at a great cost
to us locally.
I want to thank all of the Commission members for being here,
and I am going to direct my questions to the chairman in hopes
that because of time limitations the rest of you would be kind
enough to at some point in time be willing to respond too.
Mr. Wood, it has been a while since I have had as many people
as upset coming through my office here and in Augusta with you.
It has been a long time since a Federal agency has generated quite
so much concern. I have been, frankly, amazed. And in view of our
good relations with our utilities and our good relations with the
consumers, many of whom I know well as voting citizens and
friends, it is just rather been amazing.
67
Of course, I tried to defend you and tell them you were from
Texas, couldnt be all bad. But I
Mr. BARTON. All bad?
Mr. NORWOOD. All bad.
Mr. BARTON. All good.
Mr. NORWOOD. I sort of have stopped defending you. I read the
other day in Energy Daily, I think it was September the 26th, of
an interview, a remarkable interview that you had, and in that
interview there is a quote of yours reported in that article from the
Senate hearing that you were talking about punishing regulated
entities, regulated utilities. Now, the quote says, A few heads on
the stakes around the campfire may make all the animals behave
a lot better in the forest. Is that accurate?
Mr. WOOD. I recall saying that; yes, sir. Not in that context, I
would like to explain, but
Mr. NORWOOD. Well, that is accurate. That is the first thing, so
I dont have to go check the Senate record. I guess probably where
I am coming from a little bit here is I have got a great curiosity
about whose head you want to put on a stake, and I have even got
more interest in that if any of those people are friends of mine. And
I am beginning to think maybe that might be the case. In Georgia,
when we start talking about animals and campfires and forests, we
are usually talking about deer hunting. Are you a deer hunter?
Mr. WOOD. No, sir.
Mr. NORWOOD. I dont know why I sort of suspected that. But
that is a quite a metaphor. And I want toI am going to get back
to that in a little while, but I want to just get right at the bottom
line in here, and it is going to take a while, Mr. Chairman, so I
hope you will have a few rounds.
I am curios to know about this order from November the 20th
revoking market-based rates of two or three companies that were
singled out, one of which was Southern Company, which appar-
ently shifts the cost of doing business from wholesale to retail and
how this is going to affect the retail customer in Georgia. Now, I
suspect that it is going to affect the retail customer in Georgia and
probably not in a good way. I would just like to make sure that
when FERC goes utility hunting they dont end up shooting the
customer. And that is really the bottom line. I really think we all
sort of agree with that. That is really what this is about, isnt it,
the ratepayer and trying to give them the least costly electricity
with the best service.
When you decided that you wanted to force these companies into
not being able to use market-based rates, were you aware at the
time that in Southern Company at least the profits they make by
selling power at market-based rates goes back to our retail cus-
tomers to reduce their rates. At least 90 percent of the profits do.
So in the end, those profits are used by our utilities to reduce what
a member of the household might pay. I heard you talking about
customers earlier, and I am not talking here about industrial cus-
tomers; I am talking about folks at home. We you aware of that
fact when you decided that market-based rates wouldnt be good
enough for these companies, guilty or not?
Mr. BARTON. This will have to be your last question in this
round.
68
Mr. NORWOOD. I am just warming up, boss.

Mr. BARTON. I know you are just warming up, but you are 2 min-
utes over in this warmup period.
Mr. NORWOOD. All right. Well, could the
Mr. BARTON. He can answer.
Mr. NORWOOD. [continuing] Chairman answer? Thank you.
Mr. BARTON. If he has a good answer. We wont accept bad an-
swers.
Mr. WOOD. I have several. Could I respond to the full list, sir?
Is that appropriate?
Mr. BARTON. You have got the right.
Mr. WOOD. My comment on the animals in the forest, sir, related
to people who are violating the Natural Gas Act or violating the
Federal Power Act. And if they are in the context of all the Cali-
fornia issues, we were looking at market power and anti-competi-
tive conduct, at physical and economic withholding of power from
the market, those type of things. Those are people who are vio-
lating the law, and those are the people whose heads should be on
the stake.
Mr. NORWOOD. And you should do that, but dont put innocent
peoples head on the stake in the process of one-size-fits-all.
Mr. WOOD. I agree with that. We will not do that, sir. Our job
is to go through due process. In fact, we have got a number of en-
forcement actions at the Commission today. Some may result in the
finding of guilt, some may result in the finding of innocence, but
we go through that process first.
As to the order on November 20, we took the oldest three people
in line that we told 3 years ago we are going to look at this every
3 years and see if it still matches what is going on in the market-
place. We learned from Californiaas an answer to Mr. Bartons
question a moment ago, we learned from California that you could
have a deregulated marketplace or you could have one that gets
out of control as that one did, that necessitated the Commission to
come in and put what I think, as a market-oriented person, was
a very prescriptive and I think a difficult non-market-based solu-
tion on top of that market.
What we sought to do with our new policy, which we discussed
through the summer and voted on, on September 26, at that same
meeting, and implemented on November 20 with these first three
applicantsthere will be others that either pass it or dont pass the
test, coming up at this next meeting next weekis updating a pol-
icy that we have all acknowledged is broken and does not appro-
priately address market power. And if the profits from the market
were being used to refund the California retail customers, our job
is to look after the wholesale market as well. Those profits are com-
ing from a market that may have resulted in some of the wholesale
customers paying too much.
So what we are looking at here is a balance of all the customers.
I think my colleagues on the Georgia Commission are totally capa-
ble of making sure that the retail customer stays protected in that
State, but our job is to make sure that the wholesale
Mr. NORWOOD. Not if you force the wholesale basic utility com-
pany to raise rates that they cant help raise them because you are
forcing them to sell their generated power at a different rate; in
69
other words, at a cost rate rather than a market rate. They lose
money.
And my question was do you understand that 90 percent of that
money goes for the retail payer and helps then reduce the retail
rate?
Mr. WOOD. Yes.
Mr. NORWOOD. You understood that.
Mr. WOOD. Yes, sir, and we had that same policy in Texas when
I was a regulator, as do most States.
Mr. BARTON. We are going to have to suspend this question for
this period. So we are going to go to Mr. Waxman now for 5 min-
utes.
Mr. WAXMAN. Thank you very much, Mr. Chairman. Before I ask
some questions about this legislation before us, Mr. Blake, I want-
ed to ask you, I understand you have been deeply involved in ongo-
ing discussions within the administration about changing the new
source review air pollution requirements under the Clean Air Act;
is that correct?
Mr. BLAKE. Yes, sir; I have been involved.
Mr. WAXMAN. The utility industry has been the strongest pro-
ponent of rolling back these important air pollution protections.
Have you met with or otherwise received the views of the electric
utilities or other industry sectors on this topic?
Mr. BLAKE. Yes, sir.
Mr. WAXMAN. And have you met with the environmental groups
on this topic?
Mr. WAXMAN. Will you provide to the members of this sub-
committee with a list of the names and dates for all these contacts?
Mr. WAXMAN. I thank you for your cooperation.
In your testimony, Mr. Blake, you repeat seven goals for elec-
tricity legislation: Reducing uncertainty, increasing wholesale com-
petition, strengthening transmission, increasing supply, lowering
prices, protecting consumers and improving reliability. I am dis-
appointed that promoting cost effective energy conservation doesnt
even make your list. We all know that you cant improve reliability
by addressing supply and not demand for electricity. That is like
trying to balance the budget only by raising taxes and never con-
trolling spending. Your testimony also calls for modernizing elec-
tricity law but not our power sources. In fact, you urge repeal of
the PURPA provision supporting renewable energy sources. Elec-
tricity legislation should promote not disadvantage clean, renew-
able energy sources.
And, finally, you make no mention of environmental protection.
We now have evidence that our air pollution has increased under
restructuring to date. It appears that you have fundamentally
changed our electricity system without protecting air quality from
the effects of restructuring. Does the administration believe that
energy conservation, promotion of renewable energy and environ-
mental protection must be goals of any electricity restructuring leg-
islation?
Mr. BLAKE. Yes, sir. And I would just comment that there are
provisions in the legislation that we noted the administration sup-
70
ports, such as advocating net metering as well as distributed gen-

eration. In terms of emissions increase, I am not quite sure what
the baseline comparisons are pre- and post-deregulation that would
suggest that opening up markets has resulted in greater pollution.
In fact, most of the experience over the last several years has been
the addition of new cleaner natural gas-fired turbines around the
country, and I would suspect that if you looked at a per GDP basis
that you would actually see a substantial reduction in emissions
that we gained through opening up the markets, rather than an in-
crease.
Mr. WAXMAN. Thank you. Mr. Chairman, I have a report from
Synaps Energy Economics, Inc., a retrospective review of FERCs
environmental statement on open transmission access, and the
summaryboth the summary and the report I would like to have
the committee receive for the record.
Mr. BARTON. Could we have an opportunity to have the com-
mittee staff look at it?
Mr. WAXMAN. Certainly.
Mr. BARTON. I am sure we will put some version if not the whole
thing in, but we would like to at least review before we agree to
put it in the record.
Mr. WAXMAN. And since I have a second more, Mr. Blake, would
you agree that using energy more efficiently can boost our econ-
omy, enhance our energy security and help the environment?
Mr. WAXMAN. Thank you very much, Mr. Chairman.
Mr. BARTON. You still have a minute and 20 if you actually have
morewe have got the clock set at 2 minutes. It goes yellow, so
you have got a minute and a half if you still want to use it.
Mr. WAXMAN. Thank you. You are very kind, Mr. Chairman, but
I am going to yield it back for one of the other members to take
advantage of that opportunity.
Mr. BARTON. Okay. We thank the gentleman from California.
Gentleman from North Carolina, the very patient Mr. Burr, is rec-
ognized for 5 minutes.
Mr. BURR. Thank you, Mr. Chairman. Chairman Wood, what is
your definition of market power?
Mr. WOOD. The ability in a real-time market to affect price by
withholding supply.
Mr. BURR. Can that be also achieved because an entity has lim-
ited competition?
Mr. WOOD. Yes. He can withhold a certain amount of supplies,
whatever the market is. He has the ability and no competitive
check.
Mr. BURR. Could it be affected because the general capacity was
not adequate to meet the need?
Mr. WOOD. Yes.
Mr. BURR. So there are multiple reasons that there could be a
spike in price other than a company that just wanted to gouge con-
sumers; am I correct?
Mr. WOOD. Yes, absolutely.
Mr. BURR. And the end result of that would resemble market
power abuse in every case. Price would go up because something
had happened to supply; is that correct?
71
Mr. WOOD. Correct.

Mr. BURR. And how would FERC determine on the spotI take
for granted that there is a process that you go through. How long
would that be to determine whether there was a market power
finding?
Mr. WOOD. Well, quite frankly, it could take a year. I mean we
have been looking at the California market for quite some time.
There have been
Mr. BURR. And what effect would that have on Wall Streets view
of the electric industry, the companies that make it up? What effect
might that have on the availability of capital for new generation,
given that every potential charge, every potential bill that goes out
is susceptible to a refund determined by FERC over some period
of time yet to be defined?
Mr. WOOD. I think it could be a problem, and we have gotas
you may know, there is a pending item that we have out for com-
ment from the parties on just that issue.
Mr. BURR. Has the Commission ever had a finding of market
power?
Mr. WOOD. Well, we have a pending case regarding natural gas
on that issue, but I have not
Mr. BURR. Did we find a market power abuse in California? Is
there a finding of market power in California?
Mr. WOOD. Not from a specific player; no, sir.
Mr. BURR. Let me read Mr. Masseys comments. I think these
were from the debate over E47. And I quote, has concerns about
the tariff conditions, because it requires a showing of bad behavior
for FERC to order refunds. He argued that FERC has never been
able to show bad behavior, even in California. Unfortunately, he
would add another test, a bad market test. But, clearly, through
the information I found, there has never been a determination of
finding of market power in California.
Mr. WOOD. That is correct.
Mr. BURR. Biggest spike in electricity pricing.
Mr. WOOD. In the electric markets; yes, sir.
Mr. BURR. Now, given that there is a mechanism that you have
proposed, FERCs proposed, that would force the automatic refund,
would Wall Street respond differently if California were to happen
a second time with still no finding of market power?
Mr. WOOD. I was asked this question last week. Commissioner
Brownell had the opportunity to meet over 2 days with a number
of Wall Street analysts and investors. And quite frankly, the issue
of the refund authority for anti-competitive behavior I think was
viewed in its proper context, which is a customer protection issue
that, like a nuclear bomb, would never be invoked. I dont perceive
that that is
Mr. BURR. Well, a customer protection could also be extended to
our inability to allow people to compete to supply power within a
given power, because that created the same price spike as some-
body that withholds power, right?
Mr. WOOD. I am sorry, can you repeat that, Mr. Burr?
Mr. BURR. You said earlier that you get the same result when
you limit competition in a given market. So if potentially you are
72
holding people liable, shouldnt we hold those liable that limit com-
petition in a marketplace, because they artificially affect the price?
Mr. WOOD. If I missed something
Mr. BURR. I am trying to decide the scope of what FERC would
like, as a Commission, to be involved in.
Mr. WOOD. Well, I think, certainly, we would like the market to
be open and transparent and full of diverse number of players
whose
Mr. BURR. And is it transparent when every potential sale of
electricity is susceptible to a refund under a determination that
FERC will make on an undetermined amount of time?
Mr. WOOD. I have to admit I dont believe that this is actually
a cloud at all. I dont think
Mr. BURR. Well, given that there has been no finding of market
powers, why are we so insistent on this new rule that deals with
market power?
Mr. WOOD. Again, you are talking about the refund authority on
the anti-competitive?
Mr. BURR. Yes.
Mr. WOOD. The anti-competitive behavior, quite frankly, if some-
body were making a business plan of making money off of anti-
competitive behavior, I would expect that we would not allow them
to be in this market. And so I think those are the only people who
are going to be negatively affected by the condition that we placed
in all the power marketer certificates.
Mr. BURR. Because I am out of time, let me just turn to RTOs
for just a second and follow Mr. Norwood with something dear to
me, and that is the GridSouth. GridSouth was approved
Mr. WOOD. Initially; yes, sir.
Mr. BURR. Yet it is not operational. What is the problem that
FERC has with GridSouth?
Mr. WOOD. The GridSouth, again, was approved before I joined
the Commission. GridSouth was given conditional approval with
the urging that they approach their neighboring RTO proponents
in Florida and Georgia and other States to increase the scope, the
size of the relevant area over which the RTO would have control.
And so the condition for the approval was that there be sufficient
scope and
Mr. BURR. My interpretation of Order 2000 left a tremendous
amount of flexibility on governance and market rules. But now it
seems like what we are calling for is a standard market rule. We
have approved you to do an RTO, but now we want to set some
new conditions in there so we dont this to be operational. You have
been approved, but you have not met rules that we have yet as a
Commission to decide what they are going to be. Is that an accu-
rate statement?
Mr. WOOD. We are engaging in a rulemaking for standardized
market designs so that we dont have the seams issues that Com-
missioner Breathitt pointed out.
Mr. BURR. How long have we been in that now?
Mr. WOOD. I am sorry?
Mr. BURR. How long have we been in that process?
73
Mr. WOOD. We announced that we were doing the rulemaking on

September 26, and we intend to be complete on that by this sum-
mer.
Mr. BURR. If I heard you earlier, you, in an answer to a ques-
tionand I know my time is up, Mr. Chairmanbasically said, as
it related to merger authority at FERC, that you didnt have heart-
burn if that was taken away. Did I understand you accurately or
is that something you are passionate about maintaining with the
jurisdiction of.
Mr. WOOD. I think you could characterize me as thinking it is ap-
propriate to have it at FERC, but I think Congress has a right to
put these issues where they want to put them, and I dont have as
strong an opinion about that as Commissioner Breathitt may. So
I mean to be fair as to who might be the best one to discuss that,
I probably wouldnt.
Mr. BURR. That is why I chose you. I thank the chairman.
Mr. BARTON. Thank Congressman Waxman. He yielded his time
to me to use at my discretion, and then recommended that you be
given his 2 minutes. So you owe
Mr. BURR. I thank the gentleman from California.
Mr. BARTON. [continuing] you owe Mr. Waxman for that extra 2
minutes. The Chair recognizes himself for the second round of
questions for 5 minutes, and we hope that the second round we can
get all members questions on the record.
I want to go to Mr. McCullough, because I havent asked you a
question yet. I understand that the TVA is considering leasing one
or more of its unfinished nuclear power plants to a private entity,
and then the private entity would put up the operatingput up the
capital necessary to finish the plant and then lease it back to the
TVA. I am extremely, and I want to triple extremely skeptical of
such a plan. So would you like to elaborate on whether this just
some private developers wish list or is something you are seriously
considering ?
Mr. MCCULLOUGH. To my knowledge, we dont have any specific
proposal that would be specific in terms of some sort of lease pro-
posal regarding Bellafonte. I assume it would be the Bellafonte site
or perhaps Browns Ferry Unit 1 or Watts Barr Unit 2. There are
all sorts of concepts, and people who are interested in submitted
proposals to TVA we accept those and we evaluate them in a busi-
ness-like manner, and we respond.
Mr. BARTON. Well, I think I would have to look at the TVA stats
written. I dont claim to be an expert, but certainly if TVA wishes
to finish those plans and operate themselves, you have got that op-
portunity and that right. I would support legislation if it would re-
quire legislation. If you want to dispose of them and basically pri-
vatize them, let those plants be put up on the market for private
utilities to come in and bid and finish out. I would go that way,
but I am extremely leery to kind of have something that is half fish
and half fowl, that you have a government entity that still owns
it, it is financed by private capital, and then it is leased back to
the government entity. That does not sit well with me.
Mr. MCCULLOUGH. I recognize and I dont disagree with the
points you make, Mr. Chairman.
74
Mr. BARTON. Okay. I want to give Commissioner Breathitt an op-

portunity to comment on the market-based rate authority that
came out, because it is my understanding that you had a dissenting
opinion. So I want to give you a chance to dissent, because from
what I know I share most of what you dissented about. If I cant
be more leading than that, let me know and I will try again.
Ms. BREATHITT. Well, you have just given me an opportunity to
restate my views, and I would like to start by saying that I agree
with my colleagues wholeheartedly that the Commission does need
to come up with an improved way to determine applications for
market-based rates, that we may be in, or we are in, an era in the
evolution of electricity markets that the hub-and-spoke analysis is
probably not serving the public as it used to. So we all agreed that
we needed to come up with a new permanent way to assess appli-
cations for market-based rates.
That given, what I disagreed with, Mr. Chairman, is the interim
measure that the Commission decided upon for determining mar-
ket-based rates for those companies coming up for their 3-year re-
view and those entities asking for market-based rates for the first
time. I disagreed with the interim method. Would you like to know
why?
Mr. BARTON. Yes.
Ms. BREATHITT. I disagreed with the interim method because I
felt that it made the finding already that entities were engaging in
anti-competitive behavior without giving the entities a chance to
say that they werent and our Commission saying, Yes, you were,
and heres the cure. I think back to when we approved the
AEPCSW merger, and we found, using the hub-and-spoke, that
there was a potential for market power, and the cure was that they
had to sell one power plant and that that would eliminate their
ability to exercise it. In this instance, we said that every power
plant had to go back to cost-based rates, and I felt that this interim
test was too blunt, that it didnt make a more finely tuned assess-
ment; that was one part. The other was that it didnt give the par-
ties an opportunity to say whether they thought that was the best
way we could come up with an interim approach.
And the final point that I disagreed with was that it could have
unintended consequences, which we have already seen in a new ap-
plication. In another area of the country, an entity has declined to
sell power into an area where they failed the test. So the power
from that new plant will never be sold into an area in Virginia be-
causeI dont think that is what we intended, but
Mr. BARTON. Well, my problem is that we are trying to create a
real national market while protecting the rights of specific States.
If they dont want to open their markets, they dont have to. We
are not trying to preempt that. But if you are concerned about mar-
ket power, the way to prevent it, in my opinion, is to create a real
market so there are a lot of potential suppliers going into the mar-
ket. You have adequate transmission capacity to get the power to
the market. You do that and no one player that is supplying power
can dominate the market. So I would rather address market from
a market initiative than from a regulatory initiative.
And any time even the bestwe have got four very bright people
here. And to some extent, I know all four of you personally, and
75
I have the highest opinion of your intellect and your willingness to

do good public service. But when four or five people try to develop
a market test for a nation as diverse as the United State of Amer-
ica, you are almost, be definition, bound to fail. And so I would err
on the side of trying to create the market, create the transmission
grid, give the States the right to oversee at the local level, and do
it that way, instead of even with the best of intentions coming up
with something almost out of the blue. I mean Mr. Wood disagrees
with that. He is frowning. I should say out of the maroon, but then
you wouldnt like it if I said that.
So in any event, before I turn it over to Mr. Boucher, I want to
makeI asked I think in the first round of questions if everybody
supported the concept of net metering, but I want to make sure
that you allyou may not agree exactly how we are doing that me-
tering in the bill, but the concept of net metering you support. Does
the administration support that, Mr. Blake? Okay. Does the Com-
mission support it?
Ms. BREATHITT. Yes.
Mr. BARTON. Okay. I dont know that TVA would have to have
a position on net metering, but it would be nice to know if you do
support it.
Mr. MCCULLOUGH. Yes, we do, Mr. Chairman.
Mr. BARTON. I thank you. The chairman recognizes Mr. Boucher
for 5 minutes.
Mr. BOUCHER. Well, Mr. Chairman, at a minimum, I think we
could do a net metering bill.
Mr. BARTON. That is a start, that is a start.
Mr. BOUCHER. Let me give the other members of the FERC,
apart from the chairman, the opportunity to respond to the set of
questions that I had propounded to the chairman earlier. And let
me just briefly mention what these are. First of all, do you support
a continuation of your merger review authority, and if so, why? Do
you support the provisions in the legislation relating to incentive
pricing as a way to encourage new transmission construction, or do
you believe that there are other ways to accomplish the task of get-
ting new transmission lines built?
With regard to Regional Transmission Organization membership,
do you support any of the provisions in the legislation that relate
to ways that membership will be required or do you believe in the
alternative that your present processes and your present authori-
ties are adequate to accomplish that task? And do you have any
comments with regard to the uniform interconnection standards
that are contained in the legislation? Or, in the alternative, do you
think that you can go forward with current authority in order to
promote a uniform interconnection standard? Ms. Breathitt, would
you like to begin?
Ms. BREATHITT. Yes. I would like to address your question, No.
1, with respect to mergers. If I am not already on strong record,
I would like to be placed on strong record now for asking the com-
mittee to please reconsider the language in the bill that would take
away our merger authority. As I had mentioned earlier, we use a
public interest standard. We are the only agency in merger review
that uses that standard. Other agencies use a different standard,
which is no harm to competition, and I think it is real important
76
for one agency to have that standard for merger review. All merg-
ers arent created equal, and we look at the effect on rates, com-
petition and the effect on regulation. I think that is very important
for the public to have our agency as a place for that.
Mr. BOUCHER. While we are on the subject of merger review, let
me ask Mr. Massey and Ms. Brownell if they have comments con-
cerning that. Ms. Brownell?
Ms. BROWNELL. I never thought I would say this, having been on
the other side of a merger when I worked in banking for a regu-
lator, but I think we do need that authority. I think we look at it
through a different screen, but I think it is important that we
maintain discipline and focus and not use it as an opportunity for
people to have a shopping spree to extort commitments that do not
advantage either the merger, the shareholders or the consumers.
Mr. BOUCHER. Mr. Massey?
Mr. MASSEY. I agree with Commissioner Breathitt and Commis-
sioner Brownells comments. I think an important point is we have
a very public and open process for determining mergers and all
stakeholders get to come in and tell us what they think. That is
important. It is not a closed process, and keeping it open is abso-
lutely critical. And I agree that we have a broader standard than
the anti-trust agencies use, and at this particularly critical time I
would not recommend repealing our authority when we are pro-
moting competitive markets. It could be that a merger would un-
dercut the very competition that we are trying to facilitate.
Mr. BOUCHER. Thank you very much. Ms. Breathitt, would you
like to talk to the RTO issue?
Ms. BREATHITT. Yes. Because of our open architecture language
in Order 2000, we do have the ability to allow RTOs to change over
time, and I would hate to see the committee limiting our flexibility
to do that by having a very strict title. I liked your idea of address-
ing it and perhaps even mandating it, but keep the title simple to
allow the flexibility that is going to happen over time.
Mr. BOUCHER. Okay. Ms. Brownell?
Ms. BROWNELL. I would agree with Commissioner Breathitt. I
think it is very important that we encourage, mandate if you wish
to do that, people to join RTOs, but because of the evolutionary na-
ture and because we do have a different evaluation, companies
should not control the process. They act in their own self-interest,
as they should, and I applaud that. We have that larger self-inter-
est to protect the consumers and the other stakeholders, and I
think the provisions of this bill would limit that.
Mr. BOUCHER. Thank you. Mr. Massey?
Mr. MASSEY. I agree with my colleagues.
Mr. BOUCHER. Thank you, Mr. Massey. Thank you for that an-
swer; that was terrific. You are an excellent witness. That is very
much to the point.
Ms. Breathitt, Ms. Brownell and Mr. Massey, the question of in-
centive pricing.
Ms. BREATHITT. That one is tougher for me, because actually it
was a controversial part of Order 2000, and we put that in there
because it was a voluntary rule, and we wanted to have some car-
rots. It is in the reg text. Yes, it was controversial. But I do think
that the Commission can use incentive pricing, but we need to do
77
it carefully, and, as Commissioner Brownell stated earlier, we

shouldnt just be willy nilly using incentive pricing without a good
public policy goal.
Mr. BOUCHER. Do you need any additional authority to do that?
Ms. BREATHITT. It is already in our reg text. We have made it
part of the Federal regulations.
Mr. BOUCHER. So whatever is in the bill is really superfluous in
that regard?
Ms. BREATHITT. I think so.
Mr. BOUCHER. Okay. Ms. Brownell, Mr. Massey, quickly, do you
have a response?
Ms. BROWNELL. I dont think we need additional authority. I
would reemphasize let us use this to incent innovation, incent effi-
ciency, incent companies who are committed to opening markets.
We have seen some interesting models in the UK where they have
used performance-based and incentive-based ratemaking to reduce
congestion through not only building new transmission but in fact
adding innovative solutions to existing transmission. So I think we
need to just not buy into the concept without addressing those very
specific policy goals.
Mr. BOUCHER. Mr. Massey?
Mr. MASSEY. I dont think we should just throw money at trans-
mission just for the sake of it. We ought to get some bang for our
buck. If we are going to increase the incentives for transmission,
we need more transmission to actually get built, and we need good
performance in managing those transmission assets, and we ought
to insist on it.
Mr. BOUCHER. Okay. Thank you all very much. Thank you, Mr.
Chairman.
Mr. NORWOOD [presiding]. You are welcome. The Chair now rec-
ognizes Mr. Bryant, the gentleman from Tennessee, for 5 minutes
for questions.
Mr. BRYANT. Thank you. Mr. McCullough, let me ask you a few
more questions. The changes in TVA in this bill would result in the
enactment of changes that are I think very dramatic to TVA. How
do you think that TVA and TVA distributors would fare in a com-
petitive wholesale market?
Mr. MCCULLOUGH. Well, Mr. Bryant, I believe that, first of all,
has been taking steps, in terms of focusing on our business per-
formance to ensure that we had a delivered price of power that was
competitive, competitive with any region in the country, to ensure
that our reliability when benchmarked against other utilities, the
best in America, compares favorably. We have worked with our dis-
tributors to provide them with some flexibility in the requirements
of their contracts. What does thatI had dinner last night with
Herman Morris, the CEO at Memphis Light, Gas and Water. We
have a proposal on the table that would enable any one of 158
power distributors to go to the market for 10 percent of their re-
quirements with 24 months notice. They give us 24 months notice,
they can buy 10 percent of what is now total requirements con-
tract. With 36 months notice, they can buy all of their power in the
open market from another supplier.
The way we are best preparing for competitive and open market-
place that TVA desires is by having the best practices in place in
78
the way we run our business. We believe without any doubt that
TVA is competitive today and will be even more competitive in the
future. We welcome competition and choice. It needs to be done in
a manner that is consistent with the language that you and others
have made sure is in tact in this 3406. The consensus title lan-
guage welcomes competition and choice, enables TVA to compete
with investor-owned utilities and other entities. Our distributors
and the consumer can choose. We welcome that, and that is why
we are very pleased that that language is in tact in H.R. 3406.
Mr. BRYANT. Now, you have testified that there will be language
in the bill that would allow these 158 distributors to purchase their
power elsewhere. Were a distributor to do this, how would their
stranded cost be determined?
Mr. MCCULLOUGH. First of all, the language says that after
2000after September 30 of 2007, there would be no potential
stranded cost recovery for TVA. In the event that there are strand-
ed costsand we believe that we can wholesale. The fence should
fall in both directions. In other words, once this language is en-
acted into law, the distributors can choose where to buy their
power. TVA would be given the opportunity to wholesale, and I un-
derline that word wholesale outside what is now the fenced-in
area. If stranded costs become an issue, we would yield to FERC,
and we have confidence in the wisdom of FERC to determine an
equitable stranded cost recovery mechanism.
Mr. BRYANT. As I understand this new title, new generation to
serve the Tennessee Valley load could be built by TVA but also by
the distributors, by independent power producers and by other util-
ities. Is this correct, and why is it important that TVA be among
those that would be allowed to build to meet its load?
Mr. MCCULLOUGH. You are correct. That language is in tact in
H.R. 3406. TVA only asks the opportunity to compete on a level
playing field with other investor-owned utilities, independent
power producers, power marketers, as the Valleys economy con-
tinues to grow, and we hope it paces the rest of the Nation. We are
in business to serve the Valley. We feel that we ought to have the
right with the input from our power distributors. So TVA, unilater-
ally, would not make a decision on the need for new generation,
but as the Valleys economy continues to grow, we feel it is only
fair that TVA would have the right to choose, if necessary, to add
new generation capacity to meet the growing demands of our Val-
leys economy.
Mr. BRYANT. Mr. Chairman, my voice is about to go, and I would
yield back my time. Thank you.
Mr. NORWOOD. I thank the gentleman. Mr. Sawyer, you are rec-
ognized now for 5 minutes.
Mr. SAWYER. Thank you, Mr. Chairman. Let me return to a topic
that we have touched on in the course of these discussions in a
more specific way, and that is the need, as Commissioner Massey
put it, to make decisions and get on with the business of building
transmission capacity. The chairman has an approach in his bill
that has a three-pronged test whether or not new transmission ca-
pacity is needed. First, if the States have not acted within 12
months, the FERC determines that the project will be used for
79
interstate commerce, and, third, the project is in the public inter-

est.
Mine would trigger itself in a different way, but essentially come
down to similar kinds of decisions. It would make a determination
up front that there are transmission constraints and therefore a
need and create an annual list of such locations and then proceed
to permit that same, I suppose, arbitrary 12-month timeframe
within which the States might act, after which the FERC would
undertake this cut that the chairman wouldI understandably
prefer not to have to bring to his lips.
He suggested something the Department of Energy has talked
about in terms of regional siting boards. I suppose that is a nice
way around the whole States rights question, but how they would
work and how we would structure them it seems to me remains
very much open. Could you, each of you, comment on the specifics
of the siting procedures that are not only before us in the course
of this week and suggest directions that we might go to reach a
structure and a procedure that in the end would let us do what
Commissioner Massey wanted to doget on with it.
Mr. BLAKE. To start from the administrations perspective, I
think, as you have articulated, is, first, circumscribing the author-
ity very narrowly, using it only in the context where there is an
identified national interest. And our view is that that would be
something that we would identify in a larger national transmission
study. Second, that you try to make this a regional decision, using
presumably something like the RTO process, and that you would
only be addressing those instances where, for a variety of reasons,
the region cant act. I mean it would be a last step backstop.
Mr. SAWYER. Would the regions have a specific set of standards
that we would determine nationally that each region would make
separately or would they set separate standards? How do you
Mr. BLAKE. Well, I think the national interest would be identi-
fied outside of the individual regions, and then the region, presum-
ably, would have a number of different methods for addressing that
national interest.
Mr. SAWYER. Chairman?
Mr. WOOD. There are really two things that happen in a trans-
mission line. The first is the need. That is largely my experience
has been, although not exclusively, been kind of not a big issue.
The RTO engineers get an objective enough group of people that
everybody acknowledges they are expert.
Mr. SAWYER. Well, if we look at Southern California
Mr. WOOD. Well, you have got the need there. The issues then
become
Mr. SAWYER. But it was so difficult they couldnt get to it.
Mr. WOOD. And this is exactly why the RTO function is great.
You had it on a boundary between PG&E and SoCal Edison. Well,
SoCal Edison wanted to take care of the area within SoCal Edison.
PG&E wanted to take care of the people within PG&E, but nobody
really wants to build a bridge to the other one, because there is not
a lot of money in it, there is not an incentive in it, your customers
arent perceived to get a real benefit from it. Too bad, actually they
would have gotten a great benefit from it had it been worked out.
But the same thing applies that even when you regionalize some-
80
thing to an RTO, you do get around the very parochial nature of

each utility and each transmission company taking care of itself.
Mr. SAWYER. Commissioner?
Ms. BREATHITT. I think the provisions in the bill, as I have testi-
fied, take us in a very positive step forward. Now, I had advocated,
though, for outright transmission siting authority for interstate, be-
cause one State could act within the 12 months, and another State
may not. So then you have added a year to the process.
But the other point I would like to make is that the solution isnt
always a transmission solution. It might be more inexpensive to
build a power plant to solve congestion or it may be less expensive
to build a gas pipeline to serve a constraint. So as Mr. Blake stat-
ed, there are several ways to cure a congestion problem besides just
a new transmission.
Mr. WOOD. We would agree on that.
Ms. BROWNELL. Which I think speaks to the importance that an
impartial analysis done by an RTO would speak to, because they
would have no vested interest in either a transmission or a genera-
tion solution. Further, your suggestion, which I think DOE has al-
ready taken, to do an annual evaluation of transmission con-
straints and what they are costing us, because that is the point
that we havent really looked at, and is the invisible cost of, frank-
ly, doing nothing with these markets.
Mr. MASSEY. And the third possible solution, in addition to a
transmission solution or a generation solution, is a demand-side so-
lution that lightens the load. And I think the RTO planning process
can look at all three options, and on a regional basis, not just on
a State-by-State basis, but on a regional basis. What is the best re-
gional solution? It is not always transmission.
But when transmission is the best solution, we have got to get
it sited, and I think the bill is a reasonable compromise respecting
States rights and the Federal responsibility to ensure that inter-
state markets work well. We have crossed the divide. We did that
6 years ago, and we said we wanted a market-based approach at
the wholesale level. It seems to me it is now our responsibility to
make sure those markets work well, and we cant do that without
the necessary investment in transmission.
Mr. SAWYER. Thank you. Thank you, Mr. Chairman.
Mr. NORWOOD. I recognize myself now for 5 minutes, and Chair-
man Wood, if we could try to go back to where we left off.
Mr. WOOD. Yes, sir.
Mr. NORWOOD. The new FERC order that really singled out three
companies changed the formula FERC used to calculate market
power, not to mention that these companies dont have to commit
an abuse, which drives me a little crazy. Your order includes gener-
ating capacity that is used to serve its retail customers and con-
tracted commitments as far as generation and capacity. In short,
if the order is intended for the wholesale market, retail customers
shouldnt be affected by principle. The biggest problem with this
test that you have set up is that it assumes that all the generation
that a utility owns is available for sale in a whole sale market and
thus included in the market power analysis.
Now, we talked about the fact that these companies could very
easily be changed to cost-based rates for market-based rates and
81
that that would cost, for example, our major utility a lot of money
for which much of that money is used to keep the retail rates down.
Now, when you came to this decision, when you determined that
we were going to do this, did FERC take time to have a study or
look at how this would affect the rates of my constituents and
Georgia Power customers? Did you do any work in that area?
Mr. WOOD. We did not do a cost/benefit study; no, sir.
Mr. NORWOOD. Did FERC then go ahead and analyze whether re-
quiring Souther Company to post its cost for the world to see would
reduce price competition and raise the prices at which Southern
Company would have to buy power; again, another cost for my con-
stituents? Did you do a study on that?
Mr. WOOD. We didnt do a study, but we actually are pretty fa-
miliar with the split savings approach. It has been one that the
Commission has used for a while, which is how they put the cost
of them producing the next increment, and then we split the dif-
ference between them and the customers cost of buying the next
increment, which is usually a number in between those
Mr. NORWOOD. So you have a written detailed analysis of how
you determined this wouldnt affect the ratepayer?
Mr. WOOD. No, but we have a written policy of how this process
is done and was done for 80 years before the move to market-based
rates
Mr. NORWOOD. But you have made it so easy, you see, to take
people out of market-based to cost-based now that it is a greater
concern now. So we would likeyou know, I would like to know
how you are going to help me keep from raising the rates on con-
sumers in Georgia?
Mr. WOOD. Well, I think the most helpful thing that can happen
iswhich we left specifically open, is that outside the area where
they have a dominant market share, the utilities and their affili-
ates can sell into those markets in the neighboring States, the
neighboring areas, and make sales into those markets in a competi-
tive market that they dont have a dominant control, which is I
think the goal that certainly this bill seems to be pointing toward.
Mr. NORWOOD. Well, do youjust tell me this: Do you agree forc-
ing a company to post its cost of doing business for the world to
see will end up then for that company causing them to pay more
or less for power?
Mr. WOOD. I think their posting the costs for what it costs them
to generate is what regulated companies do every time they go to
retail rate cases. I think that data is certainly there for the Georgia
regulators and the Alabama regulators to look at when they set the
rates for the regulated retail side, and we are asking them to look
at the same data.
Mr. NORWOOD. Well, I dont know that the Georgia regulators
post it for the world to see. We have handled it pretty well. But
you are talking about posting it for the whole damn world to see.
Mr. WOOD. Again, I think those are
Mr. NORWOOD. And in a competitive market which you believe in
that interferes with your ability to be competitive. Let us move to
the next one because time is limited.
Mr. WOOD. Yes, sir.
82
Mr. NORWOOD. Tell me this: How many hundreds of millions of

dollars might it cost Georgia Powers retail customer when large
corporations want to interconnect to its transmission system and
must, at least according to your November 20 order, be considered
a network resource? Example: A cost that must be borne by retail
customers again rather than the interconnecting company. How
high do our rates got to go because of that November 20 order?
Mr. WOOD. Sir, I think in fact the interconnecting of more power
plants in Georgia and in every other State will put downward pres-
sure on the cost of power. The cost of power is probably 70 percent
of a Georgia customers retail bill and to have that be derived not
just from one company but from several companies competing
against each other in Georgia and in the neighboring States will
put downward pressure on the bills. That is the point of the whole
initiative: to open up the grid so that competitive power plants
compete against each other and drive those costs down. And there
may be some costs to upgrade the transmission grid.
Mr. NORWOOD. What do you mean maybe?
Mr. WOOD. Well, there may be. If the transmission grid has to
be added onto faster than other costs than the utilities rates are
coming down, which they do, they depreciate over usually a 15-, 20-
year life. If the cost of adding new plants is more than the cost of
the old plant, depreciating down, and there is no growth of load,
which is not true in that part of the country, there are a lot of
things that have to be true before rates go up.
Mr. NORWOOD. Well, that is similar to the story we heard in
Georgia about gas deregulation. It all makes sense when you sit
there behind a desk and work it out, but in the end, many of these
things you presume might happen, you think might happen in a
free market, actually dont, and the problem here is when you are
dealing with electricity in this country, energy in this country, we
better be right. And you are sitting here telling me that you have
put out a marketing order November 20 and nobody had time to
do any studies, because we dont have to worry about Georgia be-
cause we are here in Washington worrying about the country.
Somebody has to worry about what the ratepayers have to pay
at home, and I am being told by a lot of people, and it is amazing
how many people who come from different walks of life in the util-
ity market, that many of these things that you are doing are not
going to work the way you hope and I hope they do too. They are
going to increase the cost for our ratepayers. So did you do any
studies? You said no already a couple of times.
Mr. WOOD. I have answered your question, but I think it is im-
portant to realize that monopolies generally do not favor competi-
tion, despite the very strong evidence in the wholesale gas industry
that competition has resulted in tens of billions of dollars going
back to customers. Your State has chosen to go to a retail gas ex-
periment. That is a political decision. But the choice to open up
wholesale markets is an economic decision, and I think the evi-
dence is uniform.
Mr. NORWOOD. Well, it wasnt intended to be a political decision,
and my time is up. It was intended to be an economic decision, the
same as your decisions are intended to be economic decisions, and
all I am saying is when you make those decisions and you affect
83
thousands and thousands of people, then we are concerned when

you dont have a study to backI need more information, because
other smart people are saying you are not right. My time is up,
dont forget where we were, I will be right back after this vote.
Mr. Chairman, Mr. Waxman would like to have the next 5 min-
utes.
Chairman TAUZIN. He is entitled to it, I believe.
Mr. NORWOOD. Mr. Waxman, you are recognized.
Mr. WAXMAN. Thank you very much, Mr. Chairman, both Mr.
Chairmans. Mr. Wood, the policy you advocate regarding Regional
Transmission Organizations is a bit different from the policy con-
tained in H.R. 3406. You recommend that Congress authorize
FERC to require RTOs where it would be in the public interest.
H.R. 3406 mandates RTOs whether or not they are in the public
interest. Is that an accurate distinction between your position and
H.R. 3406?
Mr. WOOD. It is accurate, but it is not the source of my rec-
ommendations for amendment.
Mr. WAXMAN. Okay. I can see why you dont think there ought
to beI can see why you think there ought to be a public interest
test. If Congress or FERC chose to force States into RTOs, that
would be a pretty dramatic step. We dont yet know how much it
would cost to establish RTOs, but it could cost tens or hundreds of
millions of dollars. These costs could be borne by States and the
private sector. Is that accurate?
Mr. WOOD. Yes, sir. All costs are borne by the customer, ulti-
mately.
Mr. WAXMAN. Before mandating participation in RTOs, dont we
have an obligation to ensure that RTOs make sense economically
and from a policy perspective?
Mr. WOOD. Yes, sir. And for that reason we have agreed to do
a region-by-region cost/benefit analysis for RTOs prior to imple-
menting them.
Mr. WAXMAN. Establishing RTOs is a major Federal action, isnt
it?
Mr. WOOD. I am not sure what those words mean, but I mean
it certainly is an important thing that we would be doing.
Mr. WAXMAN. Okay. Whenever the Federal Government under-
takes something important, like a major Federal action, it is re-
quired by law to examine the potential impacts on the environ-
ment. FERC should understand this, because when it issued Order
888, FERC analyzed the expected environmental impacts of in-
creased competition. Unfortunately, we now know that FERCs
analysis got it wrong.
A new study by the North American Commission on Environ-
mental Cooperation demonstrated the links between electricity re-
structuring, increased demand for electricity and increased air pol-
lution. In 1996, FERC projected that emissions from power genera-
tion were most likely to fall under competition. Instead air emis-
sions increased and by more than FERC projected in its worse case
scenario. The CEC study shows that FERCs worse case scenario
underestimated the growth and demand from 1995 to 2000 by 4.6
percent. As a consequence, FERC underestimated emissions of ni-
trogen oxides by 4 percent and carbon dioxide by 8 percent.
84
Mr. Wood, since we agree there should be a sound policy basis

for RTOs prior to their establishment, I have the following question
for you: Would you commit today to updating FERCs projection of
the environmental impact of increased competition prior to FERCs
approval of any RTOs?
Mr. WOOD. I would not be able to agree to do that today.
Mr. WAXMAN. And why not?
Mr. WOOD. I have to look into whether actually NEPA would
apply to what is an economic regulatory action. I read the report
from the CEC that you have discussed, and I know these issues
were reviewed on the courts original review of Order 888 and
Order 2000, and I think the Commission was found to be within
what it did appropriately the first time.
Mr. WAXMAN. Well, I am going to leave it to you to review and
see whether it is required or not, along with your colleagues. But
let me ask this of the members of the Commission. Chairman Bar-
ton in text in proposed H.R. 3406 to restructure the electric utility
industry. Enron, a Texas-based energy company, has been lobbying
for the policies in this bill for years. President Bush has endorsed
Enrons model for electricity competition and his Department of
Energy has testified they are generally in favor of this legislation.
Reliant, another Texas-based energy company, has lobbied for the
demand reduction program under Section 103 of this bill. And, Mr.
Wood, you are a former Texas regulator, and you are working to-
ward the goals of this bill through administrative action.
There is a lot of support for the policies we are considering today
from companies and officials from Texas. However, the bulk of the
bill before us does not appear to apply to Texas. Texas, one State
in the continental U.S. that is not affected by the transmission pro-
visions in this legislation. Historically, Texas has been treated sep-
arately from the rest of the U.S. under the logic that electricity
does not flow across its borders. This logic is no longer true. Texas
is now connected to other States. I would like to from the members
of the Commission wouldnt it make sense to put Texas under the
same rules that apply to Wisconsin, Georgia, California, Michigan
and every other State in the continental U.S.? And wouldnt the
rest of us in the U.S. feel more comfortable if they were also in
there? Mr. Massey, do you want to comment on that?
Mr. MASSEY. Oh, I think it would probably make sense to do
that, yes.
Mr. BARTON. Would the gentleman yield?
Mr. WAXMAN. Let us get the commissioners, and then I will be
able to yield if I have any time.
Ms. BROWNELL. I think it would probably make sense. I would
also add that there have been a number of advocates for competi-
tive markets who come from other States. Certainly, Pennsylvania
has a number of those advocates, and I am one of them.
Ms. BREATHITT. I think it would make sense for all interstate
transmission to be part of the new grid that this bill is trying to
create. I dont know what it would take to do that with respect to
Texas, but I think that it should become part of the grid, just as
this bill is asking public power to become.
Mr. WAXMAN. Mr. Wood?
85
Mr. WOOD. If I didnt think it would slow down the progress that
was made in Texas for 5 years to have FERC catch up to where
Texas is, I would probably not have a problem with it. But as one
who committed the last 6 years of my professional career to ad-
vance the ideas that I am advancing here on the Federal level, I
think putting Texas under Federal jurisdiction now would dramati-
cally slow down the positive growth that has happened in my home
State and would not support it.
Mr. NORWOOD. Thank you, Mr. Waxman. Mr. Chairman, you are
recognized for 5 minutes.
Mr. BARTON. Well, I asked to beI guess unanimous consent to
be briefly
Chairman TAUZIN. I do ask to be recognized. I yield quickly to
my friend from Texas.
Mr. BARTON. I would just point out, in response to my good
friend from Californias question, you can make the argument that
it would make a lot more sense to put the same State situation in
the great State of California that we have in Texas where you have
an intrastate system with more than ample supply and an inter-
connection network intrastate, through ERCOT, that disseminates
power around the State in a very efficient and cost-effective fash-
ion.
My good friend from California knows that California has an
intrastate pipeline system for natural gas that is not subject to
FERC jurisdiction
Chairman TAUZIN. Maybe that ought to be.
Mr. BARTON. [continuing] and my recollection is that when Mr.
Green of Texas offered an amendment to make it FERC jurisdic-
tional, my good friend from California vehemently opposed that. So
let us talk apples and apples and oranges and oranges, not apples
and oranges. And with that, I would yield back.
Chairman TAUZIN. I thank my friend. I dont have a lot of time,
Mr. Chairman, because I have not had a chance on the first round
to ask a few questions. I am going to be very brief, but I am going
to submit some questions to you and the other commissioners in
writing.
I am deeply concerned, as a number of my colleagues on this
panel are concerned, about the order issued on November 20. I am
deeply concerned that it was issued without a process of public
comment and that we are hearing an awful lot of about some very
deleterious effects that it might have upon companies in our region
and more importantly upon consumer rates and decisions those
companies may make.
We are hearing, for example, that this new interim generation
market power test you have adopted may well discourage new gen-
eration investment. It may expose our regions of the country to the
same kind of problems California had, that it may indeed have the
perverse incentive against longer-term investments and thus put
us into a position where companies are making shorter-term and
riskier transactions in order to avoid flunking your test. Some have
said you put forward a test nobody can pass, and therefore it is met
and designed simply to punish or force some companies into an
RTO.
86
Now, I want those companies in an RTO; I think we all agree

with that. I think getting the companies to join RTOs is a worth-
while goal. I share that with you and Commissioner Brownell, but
I want to suggest to you that without having public comment, with
all of these incredible assertions we are hearing about the effects
of this order, that perhaps you might want to consider delaying the
effectiveness of this order until you have had a chance to go on no-
tice and accept public comments and examine some of these con-
sequences.
I join the gentleman in the chair in being very concerned about
the impact it may have on consumer rates in my part of the coun-
try. Rates are going down right now. There is no big crisis. And I
question the wisdom of putting a big change like this into effect
just perhaps to punish a few companies into joining RTOs when it
may have some pretty serious effects. Now, I will let you respond,
but I am going to ask some very specific questions on the record
in writing since I am just about out of time, I think. Chairman
Wood?
Mr. WOOD. Thank you, Chairman Tauzin. These orders, as the
others, are subject to rehearing. Rehearing is the appropriate place
for those companies and others to make comments to the Commis-
sion about these effects. The hub-and-spoke methodology, as well
as this methodology, and really all the market-based rate issues,
have always been dealt with on case-by-case adjudication and not
by rulemaking. So it is not a departure from our process to do that,
and we do have a process by which people can provide input on a
rehearing, and I think those are actually due in the next couple of
weeks for people to do so.
I have to say, as a practical matter, certainly in the South and
in other parts of the country, there is a lot of progress toward RTO
development or even independent system operators, which was the
kind of precursor to RTOs. And our order specifically said if you
are in an ISO or an RTO, that has a market monitoring, a market
mitigation function that can identify on a surgical basis anti-mar-
ket, anti-competitive behavior: that is the end goal we want. We
dont want to have to live through California again, Mr. Chairman.
We dont want the Congress to have to be put through that test,
we dont want the consumers or the State, to be put through that
test, and, actually, it is in a time when prices are low, when things
are more calm and peaceful that we should be putting the trip
wires that keep market power from hopping up and
Chairman TAUZIN. I dont deny that. I dont deny that we ought
to be encouraging the RTO transactions. I think we ought to en-
courage them, and I want to help you, but I am deeply concerned
that the interim order you have put in place may have some very
damaging effects on the market in the meantime. And you ought
to hear some public comments. Whether you hear it in rehearing
or whether you delay the implementation until you have had a
chance to ferret all these questions out, we ought to have some con-
fidence in that. None of us want to go home and say that on our
watch our Federal authority made a significant change without a
lot of public comment, that caused a dislocation of rates and gen-
eration investment in our communities when in fact we are very
87
deeply concerned about what we saw in California and it repeating

itself in other parts of the country.
I had a blackout in Louisiana, believe it or not. Energy-rich State
like Louisiana, we had one a few years ago. I cant afford the risk
of having that happen in my State, on my watch, and I would urge
you to be extraordinarily careful about receiving the public com-
ment and input you need before you move forward.
Mr. WOOD. We will, Mr. Chairman, and the comments on that
were extended at parties request until early January. So people do
have time to get that in.
Mr. NORWOOD. I thank the Chairman. I would like to close our
hearing by announcing that there will be a notice published that
will go to markup next Wednesday when we are back in town. And
I would like to close, Chairman Wood, by just telling you that I
have a lot of other questions that I am deeply sorry that we
couldnt air them here, that I would like to get very specific an-
swers to, and for you to note that we have noted that by joining
an RTO, a utility can make all these bad things go away with the
market order. And that suggests, perhaps, just suggests to an un-
trained eye that FERCs November 20 order might have been puni-
tive like heads on stakes and stuff like that.
Punishing companies who have not yet complied with Order
2000, an order that I know you know was voluntary, but it is real-
ly, in our view, the customers of Georgia Power who will be harmed
of public power in Georgia, a State that is very proud of what and
how we have been doing things. And I hope that hasnt escaped the
Commission.
There is a lot I would like to tell you about deer hunting. You
know, this thing being in the woods and campfires and all that
kind of stuff, heads on stakes, it is dealing with deer hunting but
unexperienced deer hunters can run into a lot of problems in the
woods. Sometimes you are real anxious, sometimes you have got a
itchy finger, sometimes you are staring out there real, real hard
looking for that buck-only day and everything looks like it has ant-
lers on it. And sometimes you shoot the wrong deer and you kill
that doe and you are not supposed to, and they will come along and
take your license and sometimes you are so anxious as an experi-
enced hunter that you actually wound a buck, and they are real
dangerous when they get wounded. Those antlers and hooves will
chew you up.
So we are glad you are here, and we hope we are going to be able
to work this out, but you better pick on a lot more companies than
three if you want to do any picking, particularly when one of them
is out of the Southeast. So with that, I will adjourn this hearing
until tomorrow where we will resume the hearing tomorrow. Meet-
ing adjourned.
[Whereupon, at 5:29 p.m., the hearing was recessed until Thurs-
day, December 13, 2001.]
[Additional material submitted for the record follows:]
88
FEDERAL ENERGY REGULATORY COMMISSION
OFFICE OF THE CHAIRMAN
February 13, 2002
The Honorable W.J. BILLY TAUZIN
Chairman
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
DEAR MR. CHAIRMAN: I am pleased to reply to the questions in your letter of Jan-
uary 14, 2002 on recent Commission actions regarding regional transmission organi-
zations (RTOs) and market based rate authorizations. For your convenience, Ive re-
peated your question before providing an answer.
Question (1) Please describe any analyses the Commission has undertaken of the
proper scope, configuration and market rules for RTOs and of the costs and benefits
to consumers in each State of proposed RTOs and alternatives.
Following our week-long public hearings on RTO issues in October, 2001, the
Commission committed to our state commissioner colleagues and others that we
would update and disaggregate the cost-benefit studies that were done in 1999 for
Order No. 2000. On November 1, 2001, the Commission contracted with ICF to per-
form the analyses. The base case the contractor uses in these analyses characterizes
current utility dispatch, planning, and other industry conditions important for ana-
lyzing the economic impacts of an RTO proposal. The base case also reflects the no
action alternative, i.e., status quo implementation of Order No. 888 by the Commis-
sion. The analyses include use of a modeling framework that builds scenarios need-
ed to characterize and study the proposed RTO initiatives and produce economic im-
pacts for use in economic cost and benefit analysis. We are consulting with a region-
ally diverse, interested and knowledgeable group of state Commissioners on the de-
tails of the models to make the results as accurate and meaningful as possible. Our
contractor expects to deliver the study later this month.
Question (2) As you know the Louisiana Public Service Commission issued a show
cause order to Entergy and others about why they should be allowed to join an RTO.
What have you done to resolve the concerns of state regulators in Louisiana and
other states about impacts on retail customers from utility participation in RTOs?
The Commission has worked extensively to identify and begin to solve the con-
cerns of state regulators about impacts on retail customers from utility participation
in RTOs in all the states. Specifically, in brief, we have:
Held five RTO national outreach workshops in March and April 2000;
Held state-specific sessions during the Commissions October 2001 RTO Week;
Undertaken a cost-benefit analysis of RTOs in response to state requests;
Begun using state-FERC panel discussions to identify and address RTO issues of
mutual concern;
Expanded collaboration through the National Association of Regulatory Utility
Commissioners (NARUC);
Invited and received extensive state commissioners on-the-record comments on a
number of regional RTO concerns.
The details on each of these below, though somewhat lengthy, show we continue
to work with state regulators to resolve state concerns about RTO impacts on retail
customers.
RTO National Outreach. In Order No. 2000, the Commission said that it would
undertake a collaborative process, one in which Commission staff would be fully en-
gaged with transmission owners, public and non-public utilities, as well as state offi-
cials and affected interest groups, to actively work toward the voluntary develop-
ment of RTOs. That process began in March and April 2000 with five national work-
shops, including one in Kansas City, Missouri and another in College Park, Georgia.
State Sessions During RTO Week. To continue our dialogue, we held work-
shops on RTOs in October 2001 and devoted various sessions to state issues. We
learned about the retail-customer concerns states have related to cost-shifting, RTO
startup costs, and independence.
Cost-Benefit Analysis. As discussed in response to question No. 1, during those
October meetings, the states asked the Commission to do a cost-benefit analysis for
each RTO region (and perhaps for each state) to determine the effect on retail cus-
tomers. We began that work right away and expect to have some results by late
February 2002.
State-FERC Panel Discussions. Based on the discussion at the October 2001
workshops, the Commission decided to move on two parallel tracks to finalize RTO
issues. The first track is addressing geographic scope and governance aspects of
RTO proposals after we have consulted with state commissions. The second track
89
for resolving RTO issues is a proceeding addressing transmission tariff and market
design rules for public utilities, including RTOs. This will address the issues needed
for organizations to accomplish the characteristics and functions in Order No. 2000.
The Commission has begun regional state-FERC panel discussions on RTO and
market design issues to provide a more systematic foundation for obtaining state
input. The Commission has already had state-FERC panel discussions with state
commissioners from the Midwest and Northeast and plans discussion with South-
east Commissioners on February 15. Transcripts of these discussions are placed in
the appropriate dockets. The Commission also has created a new Division of State
Relations within the Office of External Affairs.
Expanded Collaboration Through NARUC. The Commission also has reached
out to the states through the National Association of Regulatory Utility Commis-
sioners. The Commission held two of three sessions on issues of mutual concern dur-
ing NARUCs upcoming winter meetings in Washington, D.C. On February 10, we
discussed whether wholesale and retail transmission service should be under the
same rates, terms and conditions. On February 11, we discussed how regulators can
assure an adequate capacity reserve for regional energy markets. On February 14,
we will be cosponsoring with the Department of Energy a demand response con-
ference.
Finally, with respect to the specific concerns of the Louisiana Public Service Com-
mission and other Southeast state commissions, I want to assure you of my commit-
ment to carefully consider their views on these important matters.
Question (3) How does the new supply margin market power test in the Com-
missions order of November 20 differ from the established hub-and-spoke test for
market power? Did the Commission conduct any study or analysis before issuing the
new market power test to determine what percentage of vertically-integrated public
utilities, if any, would be able to pass the test? Would any such utility be able to
pass the new test?
The hub-and-spoke test for generation market power computes an applicants
market share of installed capacity and uncommitted capacity in a particular market.
A separate analysis is required for each utility that is directly interconnected with
the applicant (relevant market). The analysis compares the installed capacity of the
applicant to the sum of the installed capacity of the applicant, all utilities directly
interconnected with the applicant, and all utilities directly interconnected with the
relevant market. A similar analysis is performed for uncommitted capacity. While
the Commission did not employ a bright line test, it used a benchmark that a seller
did not have generation market power if, on balance, a seller has a market share
of 20 percent or less in each relevant market.
The supply margin assessment (SMA) builds on and improves the established
hub-and-spoke analysis in two ways. First, in determining the geographic market,
the SMA considers transmission constraints that may prevent a seller from deliv-
ering its power to a particular buyer. Thus, the SMA can more accurately determine
what supply can reach buyers to compete with the applicant. Second, in determining
the size that triggers generation market power concerns, the SMA establishes a
threshold based on whether an applicant is pivotal in the market, i.e., whether at
least some of the applicants capacity must be used to meet the markets peak de-
mand. An applicant will be pivotal if its capacity exceeds the markets surplus of
capacity above peak demandthat is, the markets supply margin. Thus, an appli-
cant will fail the SMA screen if the amount of its capacity exceeds the markets sup-
ply margin. By contrast, under the hub-and-spoke method, an applicant would pass
the screen if its market share were less than 20 percent, even if its capacity were
pivotal. Effectively, the supply margin threshold identifies whether the applicant is
a must-run supplier needed to meet peak load in a market. Thus, the supply margin
is sensitive to the potential for the applicant to successfully withhold supplies in the
market in order to raise prices.
The Commissions staff examined numerous options for addressing generation
market power, and a copy of a staff paper on the topic was made available to the
public on the Commissions website following the September 26, 2001 Commission
meeting. Because the test is an objective one, intended to apply on a nondiscrim-
inatory basis to all applicants, the Commission did not conduct a study or analysis
to determine which of the current 1200 power market certificate holders would be
able to pass the test. Whether a particular vertically-integrated public utility would
be able to pass the SMA screen will depend on the facts of a particular case. A
vertically-integrated public utility will pass the test if its capacity is not pivotal in
relevant markets; i.e., the control area that it operates or adjacent control areas.
Question (4) What findings, circumstances, or emergency conditions warranted the
Commissions apparently sudden change of policy in the November 20 order? What
90
specific findings of abuse of market power did the Commission make prior to issuing
the order?
The November 20 order was issued in response to continuing concerns raised by
intervenors in market-based rate cases (including the dockets involving AEP,
Entergy and Southern) that the hub-and-spoke analysis does not adequately assess
generation market power and, in particular, that it does not consider transmission
constraints. The issue was identified and discussed in dissenting and concurring
opinions by three of the four current FERC Commissioners in a number of orders
issued last summer. See, e.g., Sierra Pacific Power Company and Nevada Power
Company, 96 FERC 61,050 (2001); Huntington Beach Development, L.L.C., 96
FERC 61,212 (2001). In addition, the issue was discussed by the Commission at
its September 26, 2001 public meeting. As noted in response to question (3), a staff
paper discussing options for addressing market power was made available to the
public following the September 26, 2001 public meeting.
In the November 20 order, the Commission stated that it has concluded that, be-
cause of significant structural changes and corporate realignments that have oc-
curred and continue to occur in the electric industry, our hub-and-spoke analysis no
longer adequately protects customers against generation market power in all cir-
cumstances. The hub-and-spoke analysis worked reasonably well for almost a dec-
ade when the markets were essentially vertical monopolies trading on the margin
and retail loads were only partially exposed to the market. Since that time markets
have changed and expanded. While we intend to undertake a generic review of mar-
kets and market power in general, we conclude that in the interim a more appro-
priate test should be applied to ensure that customers are protected against market
power in generation. Accordingly, we have developed a Supply Margin Assessment
(SMA) screen to be used pending completion of a generic rulemaking proceeding.
97 FERC 61,219 at 61,969.
Question (5) What analysis did the Commission conduct to determine whether rev-
ocation of market based rate authority could result in increased retail rates for con-
sumers in states served by the affected utilities?
In its November 20 order, the Commission did not revoke the market-based rate
authority of the affected utilities. The Commission established cost-based mitigation
only for prospective spot market sales (i.e., less than 24 hours) within the affected
utilities control areas. The Commission subsequently deferred implementing price
mitigation measures pending further proceedings.
The Commission did not conduct an analysis to determine whether revocation of
market-based rate authority could result in increased retail rates. The Commission
stated in the November 20 order that the hub-and-spoke analysis no longer ade-
quately protects customers against generation market power In all circumstances.
Therefore, it concluded that the interim SMA screen should be applied to ensure
that customers are protected against market power in generation. 97 FERC
61,219 at 61,969. Preventing the exercise of such market power benefits the retail
customers of utilities that would otherwise have to pay excessive prices for pur-
chases from sellers with market power.
Question (6) Would a public utility that is a member of a Commission-approved
RTO be exempt from the November 20 order? If so, given that no public utility is
now a member of a Commission-approved RTO, was the order intended to penalize
RTO applicants who disagree with the Commission regarding the appropriate scope
or configuration of an RTO?
The November 20 order explains that all sales, including bilateral sales, into an
ISO or RTO with Commission-approved market monitoring and mitigation will be
exempt from the SMA and, instead, will be governed by the specific thresholds and
mitigation provisions approved for the particular markets. 97 FERC 61,219 at
61,970. As a result, a public utility that is a member of a Commission-approved
RTO would be exempt from the November 20 order to the extent that the RTO has
Commission-approved market monitoring and mitigation. The Commission-approved
market monitoring and mitigation should prevent the exercise of generation market
power in the relevant markets, thus justifying the exemption from the SMA. The
order was not intended to penalize RTO applicants who disagree with the Commis-
sion regarding the appropriate scope or configuration of an RTO. Since the Novem-
ber 20 SMA order, FERC has approved the MISO RTO, which currently supports
electric service to more than 8 million customers in 15 states across the Midwest
and Canada.
Question (7) The District of Columbia Circuit Court of Appeals recently held that
RTO participation under the Commissions Order No. 2000 is voluntary. Do you be-
lieve that indirect means of encouraging RTO participation, such as revocation of
market based rate authority, are consistent with the voluntary and flexible ap-
proach of Order No. 2000?
91
The Commissions actions are not inconsistent with Order No. 2000 and, indeed,
were taken to fulfill our responsibilities under the FPA to ensure just and reason-
able rates. Because an RTO with approved market monitoring and market power
mitigation reduces sellers ability to exercise market power within the RTO region,
and because an RTO ensures nondiscriminatory transmission access and increases
market efficiency, it is appropriate to encourage all utilities to join an RTO and is
not necessary to require those utilities in an RTO to comply with an additional mar-
ket power test such as the SMA. For utilities that do not sell in areas that have
market power mitigation in place, however, the Commission has the responsibility
under the FPA to ensure that market power cannot be exercised before it authorizes
market-based rates. Because the hub-and-spoke test no longer assures lack of mar-
ket power in generation, the Commission replaced it.
Question (8) Is it appropriate for the Commission to adopt an entirely new market
power test without first holding a rulemaking proceeding with opportunity for com-
ment? In the absence of a new rule developed out of an open process, is it appro-
priate for the Commission to revoke a utilitys market-based rate authority without
a hearing for that utility?
This question concerns legal issues that have been raised by a number of entities
in requests for rehearing of the November 20 order. Since these are pending before
the Commission now, under the Administrative Procedure Act and the Commissions
ex parte rule, it is inappropriate for me to respond to these questions at this time.
Question (9) We understand that the Commission has issued a stay with respect
to portions of the November 20 order, and we are pleased that the Commission will
convene a technical conference where affected parties will have the opportunity to
address the consequences of the order. Does the Commission also plan to engage in
an open notice-and-comment rulemaking process before adopting a new market
power test? If not, will each affected company be afforded an opportunity for a hear-
ing before its market-based rate authority is revoked under a new policy?
This question also concerns issues that have been raised by a number of entities
in requests for rehearing of the November 20 order. Thus, I cannot comment on the
merits at this time.
Question (10) Our understanding is that the Commission has not delayed the im-
plementation of that portion of the November 20 order that requires all three com-
panies to treat unaffiliated entities seeking to interconnect as competing network
resources and to post optimum areas for the location of prospective generating facili-
ties on their websites. Does the Commission intend to provide the affected parties
an opportunity for a hearing or comment before this requirement takes effect?
It is correct that the Commission has not delayed the implementation of that por-
tion of the November 20 order that requires all three companies to treat unaffiliated
entities seeking to interconnect as competing network resources and to post opti-
mum areas for the location of prospective generating facilities on their web sites.
A number of entities have raised issues regarding this aspect of the November 20
order in their requests for rehearing. The full Commission will decide at some fu-
ture time how to address these questions.
Question (11) Numerous utilities have expended a great deal of time, money and
effort to develop RTO applications that meet the RTO standards under Order No.
2000. Our understanding is that Order No. 2000 established a voluntary and flexi-
ble approach to RTO formation and specifically contemplated a variety of corporate
structures for RTOs, including independent transmission companies and inde-
pendent system operators. Despite this, the Commission has not approved a single
RTO, including RTOs that were previously conditionally approved by the Commis-
sion. Does this mean tile Commission has taken a narrower or different course on
RTO policy in departure from the voluntary and flexible approach of Order No.
2000?
No, the Commission had not changed course on RTO policy.
On December 19, 2001 the Commission granted RTO status to the Midwest ISO
(97 FERC 61,326). Although the Commission directed the Midwest ISO to make
certain additional filings, the new RTO received the authority it needed to begin to
operate immediately. The Midwest RTO began commercial operations and security
coordination in December 2001 and began providing service under a single tariff in
February 2002.
Question (12) Our understanding is that the Alliance RTO was conditionally ap-
proved several times prior to the order of December 19, in which the Alliance must
now consider merging with the Mid-West ISO (MISO). Please explain why the Com-
mission has apparently changed course with respect to the Alliance and how (if at
all) this change is consistent with the voluntary and flexible approach of Order No.
2000.
As stated in the Commissions December 19 order:
92
Our earlier finding regarding the adequacy of the scope of the Alliance RTO re-
lied, in part, on implementation of the [Inter-RTO Coordination Agreement
(IRCA)] . . . which was intended to provide the basis for a seamless market in the ter-
ritories served by the Midwest ISO and the Alliance RTO. However, since the Com-
mission issued its order approving the Settlement and its July 12 Order approving
Alliance RTOs scope, the confidence of the Commission and participating state com-
missions in the IRCAs ability to resolve seams issues has eroded. Specifically . . . the
Midwest ISO and Alliance Companies filed status reports which indicate that the
IRCA implementation has not progressed as expected . . . We have also taken addi-
tional continents from the various state commissions in the Midwest, and they over-
whelmingly prefer a single Midwest RTO and Midwest ISO as the surviving RTO.
Another change affecting our ruling is International Transmissions election to with-
draw from the Alliance RTO, thereby shrinking the Alliance RTO and concomitantly
diminishing its scope. As a result, we can no longer conclude that the proposed Alli-
ance RTO has sufficient scope consistent with the factors identified in Order No.
2000 . . . In sum, the Alliance RTO has not achieved the necessary close coordination
that was called for to achieve Order No. 2000s characteristics, and in particular,
scope, that it could not achieve on its own. 97 FERC 61,327 at 62,529-530
The December 19 order is pending rehearing, so I cannot comment further.
Question (13) The Commission states in its December 19 Alliance order that our
action should not be construed to prejudge other types of RTOs in other parts of
the country, including a structure in which a for-profit transmission company could
be an umbrella RTO. If the Commission is able to conditionally approve, and then
later reject, an RTO proposal developed at great expense on the requirements of
Order No. 2000, what assurances do RTO applicants in other regions have that
rules of the road will not change and prevent them from forming RTOs that sat-
isfy the requirements of Order No. 2000?
The rules of the road have not changed. The Commission is committed to choosing
regulatory approaches that foster competitive markets whenever possible and assure
reliable service at a reasonable price. This question also raises issues that are the
subject of rehearing and I cannot discuss it further.
I hope this information is helpful. If I can be of further assistance in this or any
other Commission matter, please let me know.
Best regards,
PAT WOOD, III
Chairman
FEDERAL ENERGY REGULATORY COMMMISSION

February 25, 2002
The Honorable JOE BARTON
Chairman, Subcommittee on Energy and Air Quality
DEAR MR. CHAIRMAN: Thank you for your letter of February 15, 2002. Your letter
cites a study issued by the Commissions staff in December 2001 on electric trans-
mission constraints. The study identified numerous transmission constraints across
the United States and stated that increases in transmission infrastructure invest-
ment would benefit customers by decreasing costs caused by congestion on existing
lines. You ask several questions about this study and the provisions in section 401
of H.R. 3406 on transmission pricing methods that could encourage expansion of the
transmission grid. Below are my answers to your questions.
Question 1: The Study states that Commission staff have identified a number of
significant transmission constraints that increase costs to customers. It identifies
16 specific constraints across the Northeast, the Eastern Interconnection, and the
West. It estimates that these constraints cost consumers more than $1 billion total
the summers of 2000 and 2001 combined. Please explain further why these con-
straints have resulted in higher electricity costs for consumers.
Answer: Transmission constraints hamper the efficient operation of markets and
increase customer costs by restricting the ability of suppliers to deliver less expen-
sive energy into constrained load pockets. This means that when customer de-
mand inside the load pocket exceeds the capability of the transmission lines to de-
liver power into the area, the transmission limit may, depending on the availability
of cheaper generation outside the load pocket, shut out additional cheaper genera-
tion and force local demand to be met by more expensive generation inside the con-
93
straint area. Thus, transmission constraints force customers to buy more expensive
energy because they cannot get cheaper energy over the transmission grid.
Question 2: The Study also set forth an objective to [r]ecognize that even with
the high estimated cost of transmission investment . . . the overall savings in energy
could significantly benefit customers. The Study apparently achieved this objective,
finding that the benefits to consumers from increased transmission investment (in
terms of the delivered price for electricity) are potentially quite large. Is substan-
tial new investment in transmission capacity necessary to eliminate or reduce the
costly constraints identified in the Study?
Answer: In many cases, yes. The transmission constraints that were studied limit
significant amounts of low-cost power imports for many hours in each year. In most
of those cases, area reliability and total power costs would be significantly improved
by construction of additional bulk transmission lines.
For other constraints, however, transmission expansion is one option to eliminate
transmission constraints, but not necessarily the only one. Other options include
building new generation, including distributed generation, and energy conservation
within the constrained area. The Study noted that substantial additional investment
in new transmission capacity could be made with only a small impact on customer
bills, and can produce significant cost savings in the delivered price of energy into
the load pocket. Moreover, all alternatives are problematic. For example, con-
structing new generation necessitates finding an acceptable location for the plant,
air pollution offsets, and additional fuel supplies. A regional planning process, such
as the one contemplated in the Commissions Order No. 2000 on regional trans-
mission organizations, is needed to determine which alternatives are both feasible
and cost effective.
Question 3: How will the Commissions transmission rate policies, including incen-
tive and performance-based rate treatments, help ensure that the transmission in-
dustry attracts sufficient investment to alleviate transmission constraints on a pri-
ority basis?
Answer: A longstanding principle of the Commissions ratemaking is that rates
must allow an opportunity for the utility to earn a return on invested capital com-
mensurate with the returns earned by other companies facing similar risks. This
principle is intended to ensure that utilities can attract the capital they need to
build infrastructure. The Commission has authorized additional incentives for trans-
mission investments in certain circumstances. Last year, for example, the Commis-
sion authorized a range of premiums on equity returns and accelerated depreciation
for transmission expansions completed by certain deadlines in the Western United
States. The goal of these rate incentives was to encourage urgently-needed infra-
structure expansions in response to the severe electric energy shortages then facing
California and other areas in the West. As another example, the Commission has
authorized a range of rate incentives for regional transmission organizations, since
these organizations can bring greater efficiencies to power markets and benefits to
customers. I am willing to consider similar incentives or other ratemaking methods
whenever necessary to ensure that utilities and independent merchant transmission
builders can obtain the capital they need to support timely and adequate expansion
of our Nations infrastructure.
Question 4: Particularly given the Studys findings regarding the benefits of in-
creased transmission investment, section 401s provisions for incentive and perform-
ance-based transmission rates seem to be reasonable and in the public interest. Sur-
prisingly, opponents of transmission rate reform have claimed that section 401
would require the Commission to set transmission rates at unjust and unreason-
able levels. In your opinion, would section 401 repeal, undermine, or otherwise be
inconsistent with the just and reasonable standard of the Federal Power Act
(FPA)? In other words, would section 401 permit or require the Commission to
charge rates that are unjust or unreasonable under sections 205 or 206 of the FPA
(either the plain text of those sections or as they have been historically construed
by the courts)?
Answer: No. Section 401 of H.R. 3406 would require the Commission to adopt by
rule:
. . . transmission pricing policies and standards for promoting the expansion and
improvement of interstate transmission networks through incentive-based and
performance-based rate treatments and other means the Commission deems
necessary or appropriate to ensure reliability of the electric system, to support
interstate wholesale markets for electric power, and expand transmission capac-
ity needed to sustain the growth of wholesale competition.
The policies and standards established under section 401 would be required to ac-
complish certain goals, such as promot[ing] economically efficient enlargement of
transmission networks, provid[ing] a return on equity that causes needed invest-
94
ment in transmission facilities to be made, promot[ing] the voluntary participation
in and formation of regional transmission organizations, reduc[ing] congestion on
transmission networks, and allow[ing] for accelerated depreciation for trans-
mission equipment and facilities. Section 401 requires that all transmission rates
approved after the effective date of the new rules must comply with, among other
things, the requirement of sections 205 and 206, that all rates, charges, terms and
conditions be just and reasonable and not unduly discriminatory.
These provisions are consistent with the existing provisions of the FPA as applied
by the Commission and interpreted by the courts. We interpret the provisions of sec-
tion 401 as clarifying authority that the Commission already has under the FPA,
in its discretion, to allow different types of non-traditional rate treatments to meet
our regulatory goals, so long as those rate treatments meet the statutory require-
ment that rates be just and reasonable and not unduly discriminatory or pref-
erential. As noted above in response to Question 3, the Commission already has
taken certain actions similar to those specified in section 401. In addition, the Su-
preme Court has held that rate-making agencies are not bound to the service of
any single regulatory formula; they are permitted, unless their statutory authority
otherwise plainly indicates, to make the pragmatic adjustments which may be
called for by particular circumstances. Permian Basin Area Rate Cases, 390 U.S.
747, 776 (1968) (citing FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 586 (1942)).
The Commission may set rates to achieve relevant regulatory purposes, and may do
so by including non-cost incentives to encourage behavior in the public interest.
Mobil Oil Corp. v. FPC, 417 U.S. 283, 316-17. Encouraging future supply is an ap-
propriate factor in determining a just and reasonable rate and adequate protection
of customers. Permian Basin, 390 U.S. at 796, 815. Accordingly, section 401 of H.R.
3406 would not permit or require the Commission to allow utilities to charge unjust
or unreasonable rates under sections 205 or 206, and would provide us continued
discretion to allow non-traditional rate treatments as appropriate.
Question 5: While the Commission already has broad authority to set the bound-
aries of the zone of reasonableness under the just and reasonable standard, do you
agree that section 401 would provide useful clarification and direction to the Com-
mission to tailor transmission rates to the policy goals of eliminating transmission
constraints, increasing efficiency of wholesale power markets, and reducing the over-
all cost of delivered power for consumers? Would section 401 help prevent non-pro-
ductive challenges to the Commissions legal authority to design rate treatments ap-
propriate to meet these policy goals?
Answer: Ensuring development of adequate energy infrastructure is vitally impor-
tant to all energy customers. One of my goals as Chairman of the Commission is
to encourage the full exercise of our statutory authority to promote such develop-
ment. While I believe the FPAs existing provisions allow the Commission to take
the types of actions addressed in section 401, some participants in the industry may
disagree. Section 401 could help reduce or forestall legal challenges on these issues.
Thus, I support the provisions of section 401.
If I can be of further assistance in this or anything else, please call me.
Best regards,
PAT WOOD, III
Chairman
THE DEPUTY SECRETARY OF ENERGY

WASHINGTON, DC 20585
January 31, 2002
The Honorable HENRY A. WAXMAN
2204 Rayburn House Office Building
Washington, DC 20515
DEAR REPRESENTATIVE WAXMAN: I am writing in response to your questions dur-
ing my testimony before the House Energy and Air Quality Subcommittee on De-
cember 12, 2001, as well as your letter dated January 25, 2002, regarding discus-
sions with electric utilities, other industry sectors, and environmental groups about
the new source review (NSR) program.
I have held the following meetings regarding the NSR program. A list of the meet-
ing attendees is enclosed.
July 10, 2001: Natural Resources Defense Council
July 18, 2001: Sinclair Oil Company
July 23, 2001: Electric Reliability Coordinating Council
July 25, 2001: The Coal-Based Generation Stakeholders Group
95
August 28, 2001: WEST Associates
August 29, 2001: Wisconsin Energy Corporation
September 10, 2001: Edison Electric Institute
November 28, 2001: Air Quality Coalition
Please let me know if I can be of any further assistance on this, or any other,
matter.
Sincerely,
FRANCIS S. BLAKE
Enclosure
ATTENDEES AT MEETINGS/DISCUSSIONS BETWEEN DEPUTY SECRETARY OF ENERGY

FRANCIS S. BLAKE AND REPRESENTATIVES FROM ELECTRIC UTILITIES, OTHER IN-
DUSTRY SECTORS, AND ENVIRONMENTAL GROUPS REGARDING: THE NEW SOURCE
REVIEW PROGRAM
July 10, 2001, Natural Resources Defense Council
David Hawkins, Natural Resources Defense Council.
July 18, 2001, Sinclair Oil Company
Clint Ensign, Klane Forsgren, Albert Knoll, Dick Wilson, Lee Lampton, Richard
Meeks, and Jim McCarthy.
July 23, 2001, Electric Reliability Coordinating Council
Glenn McCullough, TVA, Anthony J. Tony Alexander, FirstEnergy, Dwight Evans,
Southern Company, Bill Coley, Duke Power, Richard M. Dick Hayslip, Haley
Reeves Barbour, ERCC, Boyden Gray, ERCC, Marc Racicot, ERCC, Jeanette Pablo,
TVA, Michael Dowling, FirstEnergy, Karl Moor, Southern Company, David Mitchell,
Duke Energy, Henry Nickel, Hunton & Williams, Terry Grauman, Hunton & Wil-
liams, and Rene Eastman, Salt River Project.
July 25, 2001, The Coal-Based Generaton Stakeholders Group
Irl Englehardt, Peabody Energy, Tom Kuhn, Edison Electric Institute, Fred Palmer,
Peabody Energy, James Roberts, RAG American Coal, Tom Altmeyer, National Min-
ing Association, Tony Kavanaugh, American Electric Power, and Quin Shea, Edison
Electric Institute.
August 28, 2001, West Associates
Robbie Aiken, Pinnacle West Capital Corporation, Renee Eastman, The Salt River
Project, Don Elliott, Paul, Hastings, Janofsky & Walker, Dave Lock, Platte River
Power Authority, C.V. Mathai, Pinnacle West Capital Corporation, Gloria Quinn,
Southern California Edison, David Steele, Strategic Issue Management Group, and
Linda Stuntz, representing PacifiCorp.
August 29, 2001, Wisconsin Energy Corporation
Richard Abdoo, Darnell Demasters, Larry Bruniel, and Pat Quinn.
September 10, 2001, Edison Electric Institute
Gerard M. Andreson, DTE Energy, William A. Coley, Duke Energy, E. Linn Draper,
American Electric Power, Dwight H. Evans, Southern Company, Robert A. Fenech,
Nuclear, Consumers Energy, Thomas R. Kuhn, Edison Electric Institute, Gary L.
Rainwater, AmerenCIPS, James E. Rogers, Jr., Cinergy Corporation, Skiles W.
Boyd, Detroit Edison, Ray Harry, Southern Company, Mary D. Kenkel, Cinergy Cor-
poration, John D. Kinsman, Edison Electric Institute, Susan LaBombard, Ameren
Services, Alfonse S. Mannato, Jr., Edison Electric Institute, Quinlan J. Shea, III,
Edison Electric Institute, Daniel V. Steen, FirstEnergy Corporation, William F. Tyn-
dall, Cinergy, and Steven Colovas, American Continental Group.
November 28, 2001, Air Quality Coalition
Kevin ODonovan, Larisa Dobriansky, Red Cavaney, API, Tom Kuhn, Edison Elec-
tric Institute, Tom Altmeyer, National Mining Association, Henson Moore, American
Forest Paper Association, Rose Sanders, American Chemistry Council, Mark
Whittendon, National Association of Manufacturers, and James Schultz, American
Iron/Steel Institute.
96
FEDERAL ENERGY REGULATORY COMMISSION
February 28, 2002
The Honorable JOE BARTON, Chairman
Subcommittee on Energy and Air Quality
DEAR CHAIRMAN BARTON: This is in response to Congressman Waxmans request
for information asked at your subcommittee hearing on February 13, 2002. He
asked me to provide a list of my contacts with Enron officials during my terms as
a commissioner at the Federal Energy Regulatory Commission (FERC) and at the
Public Utility Commission of Texas (PUCT).
As the enclosed chronology details, I first met Ken Lay on May 29, 1996, when
I was invited to present an update on Texas telecommunications and electric utility
regulation to the members of the Governors Business Council, an advisory group
of Texas business executives that Mr. Lay had chaired since then-Governor Ann
Richards formed the council in the early 1990s.
The enclosed chronology reflects my best recollection of all contacts I had with
Enron officials based in part on calendars I have maintained since January 1996.
1 do not have any records prior to January 1996. 1 have not maintained phone logs
during this period. Despite this, I believe that the contacts in the enclosed chro-
nology represent all contacts with Mr. Lay and other officials, with the exception
of Steve Kean, with whom I may have talked by phone two or three times over the
seven-year period. From my records, the first occurrence of a meeting with Steve
Kean is in 1998, but I feel certain we had been introduced sometime prior to that
date.
In addition, the enclosed chronology does not list any meetings with non-executive
Enron staff or outside attorneys, nor does it reflect contacts I may have had at legis-
lative hearings, PUC Open Meetings, public conferences or public speeches. The en-
closed chronology does not reflect several meetings I had with former Enron de Mex-
ico President Max Yzaguirre in Texas during May, 2001 to discuss the duties of a
PUCT Commissioner.
Finally, as you prefaced your oral request with a reference to letters Mr. Lay was
reported to have written endorsing my nomination to both my current and prior po-
sitions, the letter that actually played a role in getting me an interview with then
Governor Bush in early 1995 has not been in the public record. In 1991-1993 I
worked as a legal counsel to FERC Commissioner Jerry J. Langdon, a Democrat
from Midland, Texas who had known Governor Bush for many years. Martin L.
Allday, also from Midland, was Chairman of FERC under President George H.W.
Bush, including during the time I worked for Commissioner Langdon. Shortly after
the 1994 Texas gubernatorial election, these two men wrote a letter recommending
me to Governor-elect Bush for the open PUCT position. After his inauguration, Gov-
ernor Bush called me in for an interview for the position on January 27, 1995. Dur-
ing my interview, I observed the enclosed letter from Chairman Allday and Commis-
sioner Langdon on his desk. He offered me the position after our interview. I accept-
ed it, and following my confirmation by the Texas Senate on February 22, 1995, was
sworn in by Governor Bush and joined the PUCT the following day.
I trust this information satisfies the request. Please contact me if I can provide
any further information.
Best regards,
PAT WOOD, III
Chairman
Enclosures
Cc: The Honorable Rick Boucher
97
98
THE ELECTRIC SUPPLY AND TRANSMISSION
ACT OF 2001
THURSDAY, DECEMBER 13, 2001
HOUSE OF REPRESENTATIVES,
COMMITTEE ON ENERGY AND COMMERCE,
SUBCOMMITTEE ON ENERGY AND AIR QUALITY,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30 a.m., in room
2123, Rayburn House Office Building, Hon. Joe Barton (chairman)
presiding.
Members present: Representatives Barton, Largent, Whitfield,
Ganske, Norwood, Shimkus, Fossella, Bryant, Walden, Tauzin (ex
officio), Boucher, Sawyer, Wynn, John, Waxman, Markey, Gordon,
McCarthy, and Dingell (ex officio).
Staff present: Jason Bentley, majority counsel; Sean
Cunningham, majority counsel; Andy Black, policy coordinator; Sue
Sheridan, minority counsel; and Eric Kessler, minority professional
staff.
Mr. BARTON. The subcommittee will come to order. Today is a
continuation of 2 days of hearings on the Electric Supply and
Transmission Act of 2001. These are legislative hearings on a pend-
ing bill, H.R. 3406, preparing to go to markup next week.
Today we have two panels. Our first panel is our executive
branch witnesses. We have the Honorable Isaac Hunt, who is the
Commissioner of the Securities and Exchange Commission; and we
have the Honorable Sandra Hochstetter, who is Chairman of the
Arkansas Public Service Commission. She is appearing on behalf of
the National Association of Regulatory Utility Commissioners, bet-
ter known as NARUC.
Lady and gentleman, welcome. Your statement is in the record
in its entirety. We are going to recognize you, Commissioner Hunt,
to elaborate on your statement for 6 minutes; and then we will rec-
ognize the Chairwoman Hochstetter to elaborate on her statement.
Welcome to the subcommittee.
STATEMENTS OF HON. ISAAC C. HUNT, JR., COMMISSIONER,
SECURITIES AND EXCHANGE COMMISSION; AND HON. SAN-
DRA L. HOCHSTETTER, CHAIRMAN, ARKANSAS PUBLIC
SERVICE COMMISSION, ON BEHALF OF NATIONAL ASSOCIA-
TION OF REGULATORY UTILITY COMMISSIONERS
Mr. HUNT. Thank you, Mr. Chairman, Ranking Member Boucher,
and members of the subcommittee. I am Commissioner Isaac C.
Hunt, Jr., of the U.S. Securities and Exchange Commission. I am
pleased to have this opportunity to testify before you on behalf of
(99)
100
the Commission about H.R. 3406 and the SECs continuing support
for repeal of the Public Utility Holding Company Act of 1935.
The SEC continues to support efforts to appeal the 1935 Act and
replace it with legislation that preserves certain important con-
sumer protections. In considering repeal, it is useful to review both
the history that led Congress to enact the Act in 1935 and the
changes that have occurred in the electric industry since then.
During the first quarter of the last century misuse of the holding
company structure led to serious problems in the electric and gas
industry. Abuses arose, including inadequate disclosure of the fi-
nancial position, and earning power of holding companies, unsound
accounting practices, excessive debt issuances, and abusive affiliate
transactions.
The 1935 Act was enacted to address these problems. In the
years following the passage of the Act the SEC worked to reorga-
nize and simplify existing public utility companies in order to
eliminate the problems that Congress identified.
By the early 1980s the SEC concluded that the 1935 Act had ac-
complished its basic purpose and that many aspects of it had be-
come redundant with other Federal and State regulation.
In addition, changes in the accounting profession and in the in-
vestment banking industry had provided investors and consumers
with a range of protections unforeseen in 1935. Because of these
changes the SEC unanimously recommended that Congress repeal
the 1935 Act based on its conclusion that it was no longer nec-
essary to prevent the recurrence of the abuses that led to the Acts
enactment.
For a number of reasons, including the potential for abuse
through the use of a multi-State holding company structure, re-
lated concerns about consumer protection, and the lack of a con-
sensus for change, repeal legislation was not enacted during the
early 1980s.
Because of continuing changes in the industry, however, the SEC
continued to look at ways to administer the statute more flexibly.
In response to continuing changes in the utility industry during the
early 1990s, then Chairman Arthur Levitt directed the SEC staff
in 1994 to undertake a study of the 1935 Act that culminated in
a June 1995 report.
That report again recommended repeal of the 1935 Act, or
amendment of the Act to give the SEC broad exemptive authority
to administer the Act.
The June 1995 report also outlined and recommended that the
Commission adopt a number of administrative initiatives to
streamline regulation under the Act. The SEC has implemented
many of these initiatives.
The utility industry has continued to undergo rapid change since
publication of the report. Congress facilitated some of these
changes. Specifically the Energy Policy Act of 1992 added statutory
exemptions to the 1935 Act, which allow holding companies to own
exempt wholesale generators and foreign utility companies and
allow registered holding companies to engage in a wide range of
telecommunication activities.
101
Based on the findings in 1995, as well as the continuing pace of

change in the industry, the SEC continues to recommend that Con-
gress appeal the 1935 Act, subject to appropriate safeguards.
Repeal of the Act is not, however, a magical solution to the cur-
rent energy problems in the United States. While it can be viewed
as a part of a needed response, repeal will not directly affect the
supply of electricity due to the fact that the Energy Policy Act, as
I just mentioned, removed restrictions under the Act for investment
and generation facilities.
Repeal of the Act would, however, remove provisions that pro-
hibit utility companies from owning utilities in different parts of
the country, and generally prevent non-utility businesses from ac-
quiring utilities in more than one State.
If the 1935 Act were repealed, the greatest impacts would prob-
ably be the continuing consolidation of the utility industry, as well
as the entry of new companies into the utility business.
Repeal of the Act would also eliminate any impediments that
exist to other regulators attempts to modernize regulation of the
utility industry. For example, the FERC recently implemented new
regulations designed to create independent regionally operated
transmission grids.
As a result of FERCs new regulations, many utilities will cede
operating control, and in some cases actual ownership, of their
transmission facilities, to newly created entities.
The status of both the new entities that will control these sys-
tems, and the status of the utility companies that will own stakes
in the new entities, raise a number of issues under the 1935 Act.
Most notably, it has been asserted that the limits the Act places
on the other business activities of a utility holding company will
create obstacles for non-utility companies to invest in or operate
these new transmission entities.
The SEC believes that it has the necessary authority under the
Act to deal with the issues created by FERCs restructuring with-
out impeding that restructuring. Nevertheless, repeal of the Act
would effectively resolve these issues.
In conclusion, let me emphasize that the SEC takes seriously its
duties to administer faithfully the letter and spirit of the 1935 Act
and is committed to promoting the fairness, liquidity, and efficiency
of the United States securities markets.
By supporting conditional repeal of the 1935 Act, the SEC hopes
to reduce unnecessary regulatory burdens on Americas energy in-
dustry while providing adequate protections for energy consumers.
Mr. Chairman and Members, I would be pleased to answer your
questions.
[The prepared statement of Hon. Isaac C. Hunt, Jr. follows:]
PREPARED STATEMENT OF HON. ISAAC C. HUNT, JR., COMMISSIONER, U.S. SECURITIES
AND EXCHANGE COMMISSION
Chairman Barton, Ranking Member Boucher, and Members of the Subcommittee:

I am pleased to have this opportunity to testify before you on behalf of the Securi-
ties and Exchange Commission (SEC) regarding H.R. 3406 and the SECs con-
tinuing support for repeal of the Public Utility Holding Company Act of 1935
(PUHCA or 1935 Act). In particular, because much of the regulation required by
PUHCA is either duplicative of that done by other regulators or unnecessary in the
current environment, the SEC continues to support repeal of PUHCA. H.R. 3406
would accomplish the goal of eliminating duplicative and unnecessary regulation. As
102
the SEC has testified in the past, however, we continue to believe that repeal should
be accomplished in a manner that also preserves important protections for con-
sumers of utility companies in multistate holding company systems.
I. INTRODUCTION
To understand the SECs position on repeal of PUHCA, it is useful to review both

the history that led Congress to enact PUHCA in 1935 and the changes that have
occurred in the electric industry since then. During the first quarter of the last cen-
tury, misuse of the holding company structure led to serious problems in the electric
and gas industry. These abuses included inadequate disclosure of the financial posi-
tion and earning power of holding companies, unsound accounting practices, exces-
sive debt issuances and abusive affiliate transactions. The 1935 Act was enacted to
address these problems.1 The Act also placed restrictions on the geographic scope
of holding company systems and limited holding companies to activities related to
their gas or electric businesses. Because of its role in addressing issues involving
securities and financings, the SEC was charged with administering the Act. In the
years following the passage of the 1935 Act, the SEC worked to reorganize and sim-
plify existing public utility holding companies in order to eliminate abuses.
By the early 1980s, however, many aspects of the 1935 Act regulation had become
redundant: state regulation had expanded and strengthened since 1935, and the
SEC had enhanced its regulation of all issuers of securities, including public utility
holding companies. Changes in the accounting profession and the investment bank-
ing industry also had provided investors and consumers with a range of protections
unforeseen in 1935. The SEC therefore concluded that the 1935 Act had accom-
plished its basic purpose and that many of its remaining provisions were either du-
plicative or were no longer necessary to prevent the recurrence of the abuses that
had led to the Acts enactment. The SEC thus unanimously recommended that Con-
gress repeal the Act.2
For a number of reasonsincluding the potential for abuse through the use of a
multistate holding company structure, related concerns about consumer protection,
and the lack of a consensus for changerepeal legislation was not enacted during
the early 1980s. Because of continuing change in the industry, however, the SEC
continued to look at ways to administer the statute more flexibly.
In response to continuing changes in the utility industry during the early 1990s,
and the accelerated pace of those changes, in 1994, then-Chairman Arthur Levitt
directed the SECs Division of Investment Management to undertake a study, under
the guidance of then-Commissioner Richard Y. Roberts, to examine the continued
vitality of the 1935 Act. The study was undertaken as a result of the developments
noted above and the SECs continuing need to respond flexibly in the administration
of the 1935 Act. The purpose of the study was to identify unnecessary and duplica-
tive regulation, and at the same time to identify those features of the statute that
remain appropriate in the regulation of the contemporary electric and gas indus-
tries.3
The SEC staff worked with representatives of the utility industry, consumer
groups, trade associations, investment banks, rating agencies, economists, state,
local and federal regulators, and other interested parties during the course of the
study. In June 1995, a report of the findings made during the study (Report) was
issued. The staffs Report outlined the history of the 1935 Act, described the then-
current state of the utility industry as well as the changes that were taking place
in the industry, and again recommended repeal of the 1935 Act. The Report also
1 See
1935 Act section 1(b), 15 U.S.C. 79a(b).
2 See Public Utility Holding Company Act Amendments: Hearings on S. 1869, S. 1870 and S.
1871 Before the Subcomm. On Securities of the Senate Comm. On Banking, Housing, and Urban
Affairs, 97th Cong., 2d Sess. 359-421 (statement of SEC).
3 The study focused primarily on registered holding company systems. There were, at the time
of the study, 19 such systems. The 1935 Act was enacted to address problems arising from
multistate operations, and reflects a general presumption that intrastate holding companies and
certain other types of holding companies, which the 1935 Act exempts and which now number
119, are adequately regulated by local authorities. Despite their small number, registered hold-
ing companies account for a significant portion of the energy utility resources in this country.
As of September 30, 2001, the 27 registered holding systems (which included 35 registered hold-
ing companies) owned 133 electric and gas utility subsidiaries, with operations in 44 states, and
in excess of 2500 nonutility subsidiaries. In financial terms, as of September 31, 2001, the 27
registered holding company systems owned more than $417 billion of investor-owned electric
and gas utility assets and received in excess of $173 billion in operating revenues. The 27 reg-
istered systems represent over 40% of the assets and revenues of the U.S. investor-owned elec-
tric utility industry and almost 50% of all electric utility customers in the United States.
103
outlined and recommended that the Commission adopt a number of administrative
initiatives to streamline regulation under the Act.
Since the report was published, the utility industry in the United States has con-
tinued to undergo rapid change. Some of these changes have been facilitated by
Congress. Specifically, as a result of recently-created statutory exemptions, anyone,
including registered and exempt holding companies, is now free to own exempt
wholesale generators and foreign utilities and to engage in a wide range of tele-
communication activities.4 In addition, the SEC has implemented many of the ad-
ministrative initiatives that were recommended in the Report.5
III. REPEAL OF PUHCA
Based on the findings in the Report as well as the continuing pace of change in
the utility industry, the SEC continues to recommend that Congress repeal the 1935
Act subject to appropriate safeguards.6 As the Report stated, regulation under the
1935 Act that affects the ability of holding company systems to issue securities, ac-
quire other utilities, and acquire nonutility businesses is largely redundant in view
of other existing regulation and controls imposed by the market.7 Repealing the Act
is not, however, a magic solution to the current problems facing the U.S. utility in-
dustry. PUHCA repeal can be viewed as part of the needed response to the current
energy problems facing the countrynotably, the Administrations recent report on
energy policy includes a recommendation that PUHCA be repealed.8 But repeal of
the Act will not, for example, have any direct effect on the supply of electricity in
4 Sections 32 and 33 of the Act, which were added to it by the Energy Policy Act of 1992, per-
mit, subject to certain conditions, the ownership of exempt wholesale generators and foreign
utility companies. The impact of section 32 on the electricity industry is discussed in more detail
below. Section 34, which was added by the Telecommunications Act of 1996, permits holding
companies to acquire and retain interests in companies engaged in a broad range of tele-
communications activities.
5 The Report recommended rule amendments to broaden exemptions for routine financings by
subsidiaries of registered holding companies (see Holding Co. Act Release No. 26312 (June 20,
1995), 60 FR 33640 (June 28, 1995)) and to provide a new exemption for the acquisition of inter-
ests in companies that engage in energy-related and gas-related activities (see Holding Co. Act
Release No. 26667 (Feb. 14, 1997), 62 FR 7900 (Feb. 20, 1997) (adopting Rule 58)). In addition,
the Report recommended and the SEC has implemented changes in the administration of the
Act that would permit a shelf approach for approval of financing transactions. For example,
during calendar year 2000, all eleven of the new registered holding companies received multi-
year financing authorizations that included a wide range of debt and equity securities. The Re-
port further recommended a more liberal interpretation of the Acts integration requirements
which has been carried out in our merger orders. The Report also recommended an increased
focus upon auditing regulated companies and assisting state and local regulators in obtaining
access to books, records and accounts. Six state public utility commissions participated in the
last three audits of the books and records of registered holding companies.
6 We do, however, have a concern about coupling PUHCA repeal with provisions that would
provide unique regulatory benefits to small groups of companies under other statutes that the
Commission administers. Section 125 of H.R. 3406 raises this concern. Section 125 appears to
address a unique set of circumstances that give rise to questions about the status of an issuer
as an investment company under the Investment Company Act of 1940. The Investment Com-
pany Act already provides the Commission with significant flexibility to deal with status issues.
We therefore see no reason for legislation to deal with such issues. More broadly, we are pre-
pared to work with any utility holding companies currently relying on the exemption from the
definition of investment company provided by section 3(c)(8) of the Investment Company Act
if repeal of PUHCA leads to questions about their status under the Investment Company Act.
7 As we have testified previously, however, there is a continuing need to protect consumers.
Although deregulation is changing the way utilities operate in some states, electric and gas utili-
ties have historically functioned as monopolies whose rates are regulated by state authorities.
Some regulators subject these rates to greater scrutiny than others. There is a continuing risk
that a monopoly, if left unguarded, could charge higher rates and use the additional funds to
subsidize affiliated businesses in order to boost its competitive position in other markets. Thus,
so long as electric and gas utilities continue to function as monopolies, the need to protect
against this type of cross-subsidization will remain. In view of the sophistication of contem-
porary securities regulation, and analysis by the public and private sectors, the best means of
guarding against cross-subsidization is likely to be audits of books and records and federal over-
sight of affiliate transactions. The SEC therefore continues to recommend the enactment of leg-
islation to provide necessary authority to the FERC and the state public utility commissions re-
lating to affiliate transactions, audits and access to books and records, for the continued protec-
tion of utility consumers. More broadly, repeal of the 1935 Act may be accomplished either sepa-
rately or as part of a more comprehensive package of energy reform legislation. The SEC does
not have a preference as to whether the Act is repealed on a stand-alone basis or as part of
broader, energy-related legislation.
8 See National Energy Policy: Report of the National Energy Policy Development Group at 5-
12 (May 2001) (recommending the reform of outdated federal electricity laws, such as the Pub-
lic Utility Holding Company Act).
104
the United States. The Act does not, for example, currently place significant restric-
tions on the construction of new generation facilities. As part of the Energy Policy
Act, Congress amended the Act in 1992 to remove most restrictions on the ability
of registered and exempt holding companies (as well as nonutility companies) to
build, acquire and own generating facilities anywhere in the United States. These
types of facilitiesexempt wholesale generators or EWGsare not considered to
be electric utility companies under PUHCA, and, in fact, are exempt from all provi-
sions of PUHCA. The only limitation that remains under PUHCA is one imposed
by Congress on registered holding companiesnamely, that a registered company
may not finance its EWG investments in a way that may have a substantial ad-
verse impact on the financial integrity of the registered holding company system. 9
In short, the Energy Policy Act removed restrictions on the ability of registered and
exempt holding companies to build, acquire and own generating facilities anywhere
in the United States. As a result, a number of registered holding companies now
have large subsidiaries that own generating facilities nationwide. Numerous other
companies not subject to the Act have also entered the generation business.10
Instead, repeal of the Act would eliminate regulatory restrictions that prohibit
utility holding companies from owning utilities in different parts of the country and
that prevent nonutility businesses from acquiring regulated utilities. In particular,
repeal of the restrictions on geographic scope and other businesses would remove
the impediments created by the Act to capital flowing into the industry from sources
outside the existing utility industry. Repeal would thus likely have the greatest im-
pact on both the continuing consolidation of the utility business as well as the entry
of new companies into the utility business.
Repeal of the Act would also eliminate any impediments that exist to other regu-
lators attempts to modernize regulation of the utility industry. For example, during
the past year, questions have arisen about how the Act will impact the ability of
the Federal Energy Regulatory Commission (FERC) to implement its plans to re-
structure the control of transmission facilities in the United States.11 Specifically,
in order to ensure that electricity consumers pay the lowest price possible for reli-
able service, the FERC recently implemented new regulations designed to create
independent regionally operated transmission grids that are meant to enhance
the benefits of competitive electricity markets. 12 As a result of FERCs new regula-
tions, many utilities will cede operating controland in some cases, actual owner-
shipof their transmission facilities to newly-created entities. The status of these
entities, as well as the status of utility systems or other companies that invest in
them, raise a number of issues under the Act. Most prominently, it has been as-
serted that the limits the Act places on the other businesses in which a utility hold-
ing company can engage will create obstacles for nonutility companies that may
wish to invest in or operate these new transmission entities.
The SEC believes it has the necessary authority under the Act to deal with the
issues created by the FERCs restructuring without impeding that restructuring.
Nonetheless, repeal of the Act would effectively resolve these issues.
The SEC takes seriously its duties to administer faithfully the letter and spirit
of the 1935 Act and is committed to promoting the fairness, liquidity, and efficiency
of the United States securities markets. By supporting conditional repeal of the
1935 Act, the SEC hopes to reduce unnecessary regulatory burdens on Americas en-
ergy industry while providing adequate protections for energy consumers.
Mr. BARTON. Thank you, Commissioner.
9 While no Commission approval is required for the acquisition of an EWG as a result of the
Energy Policy Act, Commission approval is required, for example, before a registered holding
company can issue securities to finance the acquisition of, or guarantee securities issued by, an
EWG. Under the Energy Policy Act, Congress directed the SEC to adopt rules with respect to
registered holding companies EWG investments. Pursuant to these requirements, in 1993 the
SEC adopted rules 53 and 54 to protect consumers and investors from any substantial adverse
effect associated with investments in EWGs. Rule 53 created a partial safe harbor for EWG
financings. Rule 53 describes circumstances in which the issue or sale of a security for purposes
of financing the acquisition of an EWG, or the guarantee of a security of an EWG, will be
deemed not to have a substantial adverse impact on the financial integrity of the system. For
transactions outside the Rule 53 safe harbor, a registered holding company must obtain SEC
approval of the amount it wishes to invest in EWGs. The standards that the SEC uses in assess-
ing applications of this type are laid out in Rule 53(c).
10 See, e.g., National Energy Policy: Report of the National Energy Policy Development Group
at 5-11 (May 2001) (noting that [m]ost new electricity generation is being built not by regulated
utilities, but by independent power producers).
11 See FERC Order 2000, Regional Transmission Organizations, 65 FR 810 (Jan. 6, 2000)
(codified at 18 C.F.R. 35.34).
12 Order 2000, 65 FR at 811.
105
We would now like to hear from the Chairwoman of the Arkan-

sas Public Services Commission, the Honorable Sandra
Hochstetter. Your statement is in the record, and we would ask
that you elaborate for 6 minutes.
STATEMENT OF HON. SANDRA L. HOCHSTETTER

Ms. HOCHSTETTER. That you, Mr. Chairman, and members of the
subcommittee. I am here today on behalf of NARUC, and we would
like to commend you for your tireless work on the issue of electric
restructuring.
We would also like to thank you for including NARUC in the dis-
cussions and process since you have been chairman of this sub-
committee. Our testimony here today is a mixture of concerns, as
well as compliments.
To begin with, NARUC would like to say that we are pleased
that you did not include a section that would expand FERC juris-
diction to include unbundled retail transmission service in H.R.
3406.
We do believe that the issue of transmission jurisdiction is now
properly before the Supreme Court. Accordingly, we recommend
that Congress allow the Court to continue to rule on transmission
jurisdiction issues prior to taking any legislative action.
Second, we would like to thank you for Section 605 with respect
to retail competition. However, we do feel that you could go a bit
further to clarify that a State can determine not to implement re-
tail competition.
The issue of whether or not that it makes economic sense for any
particular State to adopt retail competition is clearly a unique
State-specific factual inquiry that should depend upon a quan-
titative analysis of cost versus benefit.
We appreciate the difficulties with divergent points of view that
you have confronted to get the legislation to this point. However,
we feel like we must express significant concern with H.R. 3406 as
it is currently drafted.
First, as to interconnection standards. While NARUC supports
national technical power quality standards adopted by an appro-
priate technical standards organization, we must oppose the provi-
sions found in Section 101 which provides for Federal preemption
of distribution of interconnection terms, conditions, costs, and
rates.
FERC should properly focus on transmission interconnection
standards, and not distribution. We consider this to be a safety and
reliability issue, as well as a generation supply and potential cost
shifting issue, and therefore State and local officials, and retail cus-
tomers, should be responsible for working out those details.
As to net metering, while NARUC appreciates the efforts of this
committee to permit States to establish additional requirements to
those net metering standards promulgated by FERC, we must ex-
press concern and oppose the federally preemptive provisions found
in Section 102.
Once again that metering is a retail jurisdiction issue, subject to
State jurisdiction. With respect to Section 103, we support demand
management programs, but believe that retail demand reduction
106
programs should be developed by the States under traditional State

jurisdiction over retail services.
Once again, these are retail consumer programs. We do feel,
however, that Congress could be helpful in the demand reduction
area by doing things in the following areas. Congress can promote
energy efficiency programs through the use of increased funding,
tax credits, in the setting of increasingly more efficient national
building codes and standards for motors, lighting, and appliances.
And additionally Congress should continue to provide funding for
energy efficiency and conservation for low and moderate income
consumers, as these are appropriate Federal programs.
On the issue of a regional transmission organization, NARUC be-
lieves that an RTO formation can provide benefits to the market
and to all consumers provided that the policies that establish RTOs
will enhance the Federal-State partnership, and provide for truly
independent RTO governance and operation with appropriate Fed-
eral and State oversight.
The Arkansas Commission, as a matter of fact, has been one of
the strongest State Commission supporters of FERCs efforts to fa-
cilitate the formation of RTOs. However, we remain concerned that
an appropriate role for State Regulators in both RTO creation and
operation has not been formalized.
In addition, there are certain important transmission pricing
issues that need to be resolved. H.R. 3406 does not advance State
participation in any aspect of RTO governance or decisionmaking.
The mandatory participation provisions of H.R. 3406 also fail to
recognize and take into consideration that currently under State
laws utilities are generally required to obtain State Commission
approval to participate in RTOs if the membership would require
transfer of assets into the RTO.
In addition, we believe that Congress should require FERC to
recognize States interests in actively reviewing questions of RTO
governance. These areas would include the development and revi-
sion of market rules, reliability in planning, access to RTO market
monitoring information, and development with Federal authorities
of market power mitigation programs.
With respect to transmission reliability, NARUC has consistently
agreed that reliability should be addressed in any Federal elec-
tricity legislation. However, we believe that while this needs to
take place on a Federal level, the law should also preserve the au-
thority of the States to set more rigorous standards when deemed
to be in the public interest.
Congress should expressly include in the legislation a savings
clause that would protect existing State authority to ensure reli-
able transition service, as well as a regional advisory role for the
State.
State officials ultimately will be held accountable by the public
when the lights fail to stay on. So, because of this responsibility,
we believe that we need to act effectively to ensure uninterrupted
electricity service.
With respect to siting authority, we would strongly oppose any
legislative provisions that contemplate Federal siting authority.
While the Arkansas Commission certainly understands the basis
for the recommendation by some parties that transmission siting
107
authority should be vested in FERC, we would recommend that the

States, utilizing where appropriate regional mechanisms, continue
to have primary siting authority.
And then if such regional approaches once employed prove inad-
equate or fail, then the question of FERCs role can certainly be re-
visited at that time. In conclusion, we would like to thank you
again for our ability to participate in this process.
Unfortunately, we cant support the bill as it is currently drafted.
We dont believe that a compelling case has been made for Federal
preemption of State retail authority. Congress can and should do
much to help the wholesale market and focus on those issues.
But it should stop short of usurping State regulatory jurisdiction
over retail matters. Thank you again, and I would be happy to an-
swer any questions that you may have.
[The statement of Hon. Sandra L. Hochstetter follows:]
PREPARED STATEMENT OF HON. SANDRA L. HOCHSTETTER, CHAIRMAN, ARKANSAS
PUBLIC SERVICE COMMISSION ON BEHALF OF THE NATIONAL ASSOCIATION OF REGU-
LATORY UTILITY COMMISSIONERS
Mr. Chairman and Members of the Subcommittee: My name is Sandra L.

Hochstetter. I am the Chairman of the Arkansas Public Service Commission. I am
here today on behalf of the National Association of Regulatory Utility Commis-
sioners, commonly known as NARUC. I greatly appreciate the opportunity to appear
before the House Energy and Commerce Subcommittee on Energy and Air Quality
and I respectfully request that NARUCs written statement be included in todays
hearing record as if fully read.
NARUC is a quasi-governmental, nonprofit organization founded in 1889. Its
membership includes the State public utility commissions for all States and terri-
tories. NARUCs mission is to serve the public interest by improving the quality and
effectiveness of public utility regulation. NARUCs members regulate the retail rates
and services of electric, gas, water and telephone utilities. We have the obligation
under State law to ensure the establishment and maintenance of such energy utility
services as may be required by the public convenience and necessity, and to ensure
that such services are provided at rates and conditions that are just, reasonable and
nondiscriminatory for all consumers.
Mr. Chairman, NARUC commends you for your tireless work on the issue of elec-
tric restructuring. We would also like to thank you and your staff for including
NARUC in the discussions and process since you have been Chairman of this Sub-
committee. You have been willing to speak to our members on numerous occasions
and have been consistently willing to listen to our concerns.
NARUC is pleased that you did not include a section that would expand FERC
jurisdiction to include unbundled retail transmission service in H.R. 3406. We be-
lieve that the issue of transmission jurisdiction is now properly before the Supreme
Court. Accordingly, NARUC continues to recommend that Congress allow the Court
to rule on transmission jurisdiction issues prior to taking any legislative action. We
would also like to take this opportunity to thank you for section 605, which clarifies
that this legislation will not require a State to implement retail competition or re-
quire the unbundling of retail transmission.
Mr. Chairman, while we do appreciate the difficulties with divergent points of
view you have confronted to get this legislation to this point, NARUC must express
our significant concerns with H.R. 3406 as it is currently drafted. NARUC is trou-
bled by the great extent to which the bill intrudes into areas now regulated by the
States.
I would now like to share NARUCs views on specific provisions found in H.R.
3406. In some instances the NARUC positions may be at variance with the view of
the Arkansas Commission and I will note these distinctions.
INTERCONNECTION; NET METERING; DEMAND MANAGEMENT
While NARUC supports national technical power quality standards adopted by

appropriate technical standards organizations, we must oppose the provisions found
in section 101 which provide for the Federal pre-emption of distribution interconnec-
tion terms, conditions, costs and rates. NARUC believes that Congress should sup-
port the States authority to work with local distribution utilities and other stake-
108
holders, including the renewable and small generating community, to provide inter-
connection arrangements for self-generation units that utilize the local distribution
network. NARUC considers this a safety and reliability issue, as well as a genera-
tion supply and potential cost shifting issue, and therefore State and local officials
and retail customers should be responsible for working out cooperative solutions
that best fit the specific circumstances of connection to a distribution system. This
way the safety, reliability, and economic impact concerns of a particular project and
system are not jeopardized by a generic rule promulgated without the benefit of the
project and systems unique specifications.
While NARUC appreciates the efforts to permit States to establish additional re-
quirements to those net metering standards promulgated by FERC, NARUC must
also oppose the Federally pre-emptive provisions found in section 102. Once again
we must stress that net metering is a retail issue subject to State jurisdiction.
NARUC supports legislation removing federal barriers to State implementation of
net metering. The most critical barrier involves the current lack of jurisdictional
clarity over net metering. The Federal Power Act has been alleged to preempt State
net metering programs, slowing development of this promising new approach to pro-
moting competition and resource diversity. Therefore, the bill should be amended to
promote State implementation of net metering programs of the States own choos-
ing, in the States own time, rather than being forced to implement minimum stand-
ards of FERCs choosing.
With regard to section 103, NARUC supports demand management programs, but
believes that retail demand reduction programs should be developed by the States
under traditional State jurisdiction over retail services. Congressional action to pro-
vide for more robust and effective demand-side options, without FERC pre-emption
of the States, can be accomplished.
For example, Congress could promote energy efficiency programs through in-
creased funding, tax credits, and the setting of increasingly more efficient national
building codes and standards for motors, lighting and appliances.
Congress could also promote planning strategies for maintaining a proper balance
between supply and load, which includes demand-side management techniques (in-
cluding price-responsive demand mechanisms), intermittent and renewable re-
sources, conservation/energy efficiency programs, as well as traditional supply and
transmission options. One good way for Congress to act in this area would be to au-
thorize willing States to address these issues on a regional basis. I would note that
regulators in Arkansas, Louisiana, and Mississippi and the Entergy Corporation
supported legislation introduced by Senator Dale Bumpers in the early 1990s,
which would have authorized States that regulated electric utilities operating under
PUHCA to conduct integrated resource planning on a regional basis. I believe such
approaches are even more appropriate now than ten years ago.
Finally, Congress should continue to provide funding for energy efficiency and
conservation for low and moderate income consumers through programs that pro-
vide education, weatherization, housing improvements, installation of higher effi-
ciency appliances, and similar usage reduction measures.
Taken together, these options could help lower costs to consumers, reduce load,
conserve valuable resources, and lower costs to utilities, while spreading the costs
and benefits to all retail ratepayers, rather than providing benefits to just large in-
dustrial customers.
PUHCA
Congress should reform the Public Utility Holding Company Act (PUHCA), but in
doing so, should allow the States to protect the public through maintaining effective
oversight of holding company practices and expanding State access to holding com-
pany books and records, independent of any similar authorities granted to the fed-
eral regulatory bodies. NARUC believes that Subtitle B of H.R. 3406 fits within our
criteria for support.
PURPA
NARUC supports legislation to lift PURPAs purchase requirement where a State

determines that generating markets are competitive or that the public interest in
resource acquisition is protected. However, NARUC opposes pre-empting State juris-
diction by granting FERC authority to order the recovery of costs in retail rates or
to otherwise limit State authority to require mitigation of PURPA contract costs. It
is NARUCs position that the States that have already approved these contracts are
in a better position to address this issue than FERC.
109
In section 133, FERC is directed to promulgate and enforce regulations to provide
for recovery of PURPA costs. Therefore, NARUC cannot support the PURPA provi-
sions found in H.R. 3406.
REGIONAL TRANSMISSION ORGANIZATIONS (RTO)
On the important issue of RTOs, NARUC believes that RTO formation can pro-
vide benefits to the market and all customers, provided the policies that establish
RTOs enhance the Federal-State partnership and provide for truly independent
RTO governance and operation with appropriate Federal and State oversight. The
Arkansas Commission has been one of the strongest State commission supporters
of FERCs efforts to facilitate the formation of RTOs. However, we remain concerned
that an appropriate role for State regulators in both RTO creation and operation
has not been formalized.
Unfortunately, H.R. 3406 does not advance State participation in any aspect of
RTO governance or decision making. The mandatory participation provisions of H.R.
3406 fail to recognize that currently, under State laws, utilities are generally re-
quired to obtain State commission approval to participate in RTOs, if RTO member-
ship requires the utility to relinquish control or divest the transmission facilities
held in the retail rate base. For instance, the utilities whose facilities comprise ex-
isting RTOs, which are grandfathered in section 202 (h) (6) on page 64, received
State commission approval to participate in those RTOs.
Congress should require FERC, in cooperation with the States, to determine
boundaries, structure, and functions for regional transmission organizations (RTO).
The RTOs should be given sufficient authority to perform regional grid management
and expansion, while providing for efficient system operations that are built and op-
erated in the most economical, reliable and environmentally acceptable way in order
to realize shortterm and longterm reliability as well as facilitate efficient wholesale
market transactions.
Congress should require FERC to recognize the States interest in actively review-
ing questions of RTO governance. This would include: development (and revision)
of market rules; reliability and planning; access to RTO market monitoring informa-
tion; and development, with federal authorities, of market power mitigation pro-
grams.
In addition, Congress should require that RTOs or other regional bodies have suf-
ficient authority to conduct long term planning for their regions and, working with
the States and transmission owners, implement long-term planning that should:
1. Recognize the need for new investment in transmission facilities;
2. Assures that reliability is not compromised;
3. Reduces any decisional role for entities with unreasonable market power; and
4. Provides a cost allocation method that is objective, non-discriminatory, weighs en-
vironmental and societal risk, and ensures that costs are allocated in a propor-
tionate manner to those that receive the benefits.
TRANSMISSION RELIABILITY
In numerous communications with this Subcommittee, both in letters and in testi-

mony, NARUC has consistently and repeatedly expressed the belief that reliability
should be addressed in any Federal electricity legislation. Our position as to what
policies must be included in any reliability legislation have been equally consistent.
NARUC believes that Congress should mandate compliance with industry-devel-
oped reliability standards for the bulk power system, while preserving the authority
of the States to set more rigorous standards when deemed to be in the public inter-
est. Congress should also ensure that States continue to have the authority to estab-
lish effective price signals that allow consumers to choose alternative levels of reli-
ability and power quality. To that end, Congress should expressly include in legisla-
tion: (1) a savings clause to protect existing State authority to ensure reliable trans-
mission service, and (2) a regional advisory role for the States.
We would like to thank you Mr. Chairman for including in Title III of H.R. 3406
the savings provisions that were substantially the similar to those savings provision
included in S.2071 which was passed by the Senate during the 106th Congress.
However, I would also like to bring to your attention that H.R. 3406 does not ad-
dress a regional advisory role for the States, which is especially critical to western
States.
Reliability language should not fail to provide a continuing role for States in en-
suring reliability of all aspects of electrical service, including generation, trans-
mission, and power delivery services or results in FERCs preemption of State au-
thority to ensure safe and reliable service to retail consumers. State officials will
be held accountable by the public when the lights fail to stay on. Because of this
110
responsibility, State officials and regulators are particularly concerned that they be
able to act effectively to ensure uninterrupted electricity service.
TRANSMISSION SITING AUTHORITY
NARUC strongly opposes any legislative provisions that contemplate Federal

siting authority. States should retain authority to site electric facilities, while Con-
gress should support the States authority to negotiate and enter into cooperative
agreements or compacts with federal agencies and other States to facilitate the
siting and construction of electric transmission facilities as well as to consider alter-
native solutions to such facilities, such as distributed generation and energy effi-
ciency. Here again Congress should authorize the development of regional ap-
proaches in this area.
Giving FERC eminent domain and siting authority is not a panacea. Beyond the
practical matter of the time FERC would need to be prepared to assume this new
role and the additional funds that Congress would need to appropriate to accomplish
this, NARUC does not believe that many examples actually exist, beyond anecdotal
evidence, where a State action (or inaction) is solely responsible for unreasonably
preventing a needed transmission project. Further, the numbers of examples that
may exist do not warrant Federal pre-emption in this area.
In addition, there may be alternatives to a specific transmission project. A State
may determine that a transmission line is not necessary if, for example, distributed
generation is used instead, thereby saving valuable resources and protecting citizens
from the unnecessary effects of the transmission project.
While the Arkansas Commission does understand the basis for the recommenda-
tion by some parties that transmission siting authority should be vested in the
FERC, we would recommend that the States, utilizing where appropriate regional
mechanisms, continue to have primary siting authority. If such regional approaches
once employed prove inadequate, the question of FERCs role can certainly be revis-
ited.
CONSUMER PROTECTION
NARUCs members have a long standing commitment to consumer protection. In-

deed, State utility commissions were established to ensure that consumers received
essential services without fear of predatory practices and pricing. Therefore, we
compliment you for your attention, Mr. Chairman, to the consumer issues that are
found in H.R. 3406. However, while we favor strong consumer protection measures,
NARUC does not believe that pre-empting the States by Federally legislating retail
consumer protections is the way to go. The States are more capable in dealing with
abuses that occur at the retail level, and in fact many, if not most, of the States
that have moved to restructure and unbundled their retail electric markets have in
place regulations or laws that address the consumer issues found in H.R. 3406. In
short, Congress should not limit State authority to prescribe and enforce laws, regu-
lations or procedures regarding consumer protection.
NARUC believes that it would be helpful if Congress would reinforce the States
authority to require all load serving entities to disclose generation sources and ac-
companying environmental impacts. Additionally, Congress should require regional
transmission organizations, system operators, reliability counsels and other regional
agencies to adopt policies that allow public access to information necessary to enable
adequate monitoring of energy markets, while also providing protection for informa-
tion demonstrated to be commercially sensitive.
Mr. Chairman, in conclusion, NARUC would again like to thank you for your ef-
forts on this legislation and for offering us an opportunity to express our views. For
your review and information I have included, as part of this testimony
(Attachment1), a copy of the NARUC National Electricity Policy that was adopted
by the NARUC membership at our Annual Convention in November.
Unfortunately, NARUC cannot support H.R. 3406 as drafted. We do not believe
that a compelling case has been made for Federal pre-emption of State retail au-
thority. It is the position of NARUC that Congress can do a great deal to advance
and enhance the wholesale market without risking possible harm to those retail in-
stitutions that have heretofore not experienced the major dislocations that have oc-
curred in wholesale markets.
NARUC would welcome the opportunity to work with you and your office prior
to the Subcommittee markup to address the concerns raised here today. I would be
happy to answer any questions you may have.
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ATTACHMENT 1
NARUCS NATIONAL ELECTRICITY POLICY
I. GENERAL PRINCIPLES
The nations energy policy should assure adequate, reasonably priced, reliable,
safe, and environmentally sound electricity. To achieve this goal, Federal legislation
should:
1. Encourage additional fuel- and technology-diverse supply resources to meet the
nations growing energy demands;
2. Promote demand-side management to achieve the most efficient use of electricity;
3. Provide for reliability standards and their enforcement;
4. Assure open and effective regional wholesale markets;
5. Minimize the environmental impacts of energy generation, delivery and use; and
6. Respect, preserve and strengthen the States traditional roles in regulating dis-
tribution systems, planning, siting approval, reliability assurance, and con-
sumer protection.
II. DIVERSE, PLENTIFUL AND ENVIRONMENTALLY RESPONSIBLE EN-
ERGY SUPPLIES
A. Congress should encourage environmentally responsible electricity generation
and the increased use of renewable energy technologies as a tool to achieve fuel
diversity and greater energy security.
B. Congress should encourage domestic exploration and production of new natural
gas supplies and expansion of natural gas transmission and delivery infrastruc-
ture in an environmentally sound manner at reasonable costs, but should avoid
an overreliance on natural gas for new electric generation.
C. Coal fuels a significant portion of the nations electric power and is expected to
do so for the foreseeable future. However, because of coals air emissions, it is
important that Congress and States work together to reduce such air emissions
and encourage development of lowpolluting central station generation, including
clean-coal technology.
D. Congress or the Administration should increase the efficiency for licensing and
relicensing processes of hydroelectric and nuclear facilities, without compro-
mising substantive environmental and safety standards.
E. Although nuclear facilities create long-term radioactive waste problems, they
should continue to play an important part of our national electric supply port-
folio because they provide a significant portion of the nations electricity supply
and do not produce air emissions.
F. Congress needs to fulfill its commitment to provide the long-term storage of spent
nuclear fuel very quickly. To accomplish this, Congress should ensure that the
Nuclear Waste Fund revenue and appropriations are managed responsibly and
used only for the establishment of a permanent repository. Pending develop-
ment of a permanent repository, it is better to store spent fuel at one (or more)
central location(s) on an interim basis than to leave it at reactor sites.
G. The States support ongoing and renewed efforts to maintain the security of nu-
clear power plants and prevent the proliferation of weapons-grade byproducts.
H. Congress should enact legislation to lift the Public Utility Regulatory Policies
Acts mandatory purchase requirement, but should allow the States to deter-
mine appropriate measures to protect the public interest in resource acquisition
and to address mitigation and cost recovery issues associated with these con-
tracts.
III. DEMAND MANAGEMENT
A. Congress should promote energy efficiency programs through increased funding,
tax credits, and the setting of increasingly more efficient national building codes
and standards for motors, lighting and appliances.
B. Congress should promote planning strategies for maintaining a proper balance
between supply and load that includes demand-side management techniques
(including price-responsive demand mechanisms), intermittent and renewable
resources, conservation/energy efficiency programs, as well as traditional supply
and transmission options.
C. Congress should continue to provide funding for energy efficiency and conserva-
tion for low and moderate income consumers through programs that provide
education, weatherization, housing improvements, installation of higher effi-
ciency appliances, and similar usage reduction measures.
112
IV. RTOS, RELIABILITY, PLANNING & DELIVERY INFRASTRUCTURE
A. Regional Transmissions Organizations
1. Congress should require the FERC, in cooperation with the States, to determine
boundaries, structure, and functions for regional transmission organizations
(RTO).
2. Congress should require the FERC to give RTOs sufficient authority to perform
regional grid management, expansion, and efficient system operations that are
built and operated in the most economical, reliable and environmentally accept-
able way to realize shortterm as well as longterm reliability and facilitate effi-
cient wholesale market transactions.
3. Congress should require the FERC to recognize States rights to active participa-
tion in RTO governance. This would include development (and revision) of mar-
ket rules, reliability and planning, access to RTO market monitoring informa-
tion, development, with federal authorities, of market power mitigation pro-
grams.
B. Long-term planning
1. Congress should require that RTOs or other regional bodies have sufficient au-
thority to conduct long term planning for their regions and, working with the
States and transmission owners, implement long-term planning that should:
(a) Take into account fuel diversity including renewables resources;
(b) Recognize the need for new investment in generation and transmission fa-
cilities that provides adequate reserve margins;
(c) Assure that reliability is not compromised by resource imbalances;
(d) Reduce any decisional role for entities with unreasonable generation or
transmission market power;
(e) Include broad public participation and collaboration among market partici-
pants and third party participation in offering competitive alternatives such
as demand-side and distributed generation options;
(f) Develop a cost allocation method that is objective, non-discriminatory, weighs
environmental and societal risk, and associates costs with benefits;
(g) Allow the use of competition, subject to appropriate regulatory oversight, to
encourage robust wholesale markets; and
(h) Assure adequate resources in all regions of the nation.
2. Congress should support the States authority over local distribution utilities to
provide interconnection arrangements for selfgeneration and generation units
that utilize the local distribution network.
C. Reliability
1. Congress should mandate compliance with industry-developed reliability stand-
ards on the bulk power system that include adequate reserve margins and pre-
serve the authority of the States to set more rigorous standards when deemed
to be in the public interest.
2. Congress should ensure that States continue to have the authority to establish
effective price signals that allow consumers to choose alternative levels of reli-
ability and power quality.
D. Delivery Infrastructure
1. States should retain authority to site electric facilities, while Congress should
support the States authority to negotiate and enter into cooperative agreements
or compacts with federal agencies and other States to facilitate the siting and
construction of electric transmission facilities as well as to consider alternative
solutions to such facilities, such as distributed generation and energy efficiency.
2. Congress should pursue policies that promote and ensure pipeline safety, and
streamline existing siting processes to increase administrative efficiency, includ-
ing the coordination of all federal, State and local participation in these proc-
esses, without compromising substantive environmental and safety standards.
V. ENERGY MARKETS
A. Access to Information
1. Congress should recognize that States implementing competitive retail markets
and those with traditional regulatory structures, and Federal, State and re-
gional agencies and organizations overseeing the development of wholesale en-
ergy markets require comprehensive and timely market information. Congress
should adopt policies that safeguard public access to information necessary to
enable the monitoring of these markets, while also providing protection for in-
formation demonstrated to be commercially, or otherwise, sensitive.
113
B. Retail Markets
1. Congress should not interfere with the States authority over all aspects of retail
service including the authority to determine just and reasonable retail rates,
and those retail rates designed to encourage reductions in peak demand and to
encourage demand-side management options.
2. Congress should not mandate retail electricity competition.
C. Wholesale markets
1. Congress should require the FERC to promulgate clear and consistently applied
market rules that foster investment in generation, transmission and demand-
side management resources.
2. Congress should mandate effective and independent monitoring of the wholesale
electricity markets and empower the relevant States and federal agencies with
authority to investigate, enforce, and remedy problems resulting from the exer-
cise of market power or other abusive behavior that distorts market operations.
Such remedies should include the use of structural remedies, codes of conduct,
or affiliate rules.
3. Congress should preserve a States ability to require that a utilitys retained gen-
eration be used to serve native load.
VI. ENVIRONMENTAL PROTECTION
A. Congress should assure that State and federal energy and environmental policies
be coordinated and complementary.
B. Congress should address all air emissions from all electric power generation in
ways that: 1) minimize adverse environmental impacts; 2) are comprehensive
and synchronized to reduce regulatory costs; 3) rely, to the extent possible, on
market-based trading mechanisms, and 4) identify, to the extent possible, the
net impact of resource decisions, including external factors, on public health,
the environment and the economy.
C. Congress should assist States and utilities to establish programs to phase out
power plants grandfathered under the Clean Air Act with facilities that utilize
clean coal technology or by other means, in a way that preserves the integrity
of the bulk power system and minimizes the economic impact on local areas.
VII. CONSUMER PROTECTION
A. Congress should not limit State authority to prescribe and enforce laws, regula-
tions or procedures regarding consumer protection.
B. Congress should reinforce the States authority to require all load serving entities
to disclose generation sources and accompanying environmental impacts.
C. Congress should address the preservation of public benefits in any electric indus-
try restructuring legislation. Societal costs and benefits should be studied prior
to the adoption of any particular implementation or funding mechanism.
D. Congress should require regional transmission organizations, system operators,
reliability counsels and other regional agencies to adopt policies that allow pub-
lic access to information necessary to enable adequate monitoring of energy
markets, while also providing protection for information demonstrated to be
commercially sensitive.
E. Congress should reform the Public Utility Holding Company Act (PUHCA), but,
in doing so, should allow the States to protect the public through maintaining
effective oversight of holding company practices and expanding State access to
holding company books and records, independent of any similar authorities
granted to the federal regulatory bodies.
Mr. BARTON. Thank you.
The Chair would recognize himself for the first 5 minutes of
questions. Commissioner Hunt, you stated that your agency sup-
ports repeal of PUHCA you said with proper safeguards. Could you
elaborate on the proper safeguards, please?
Mr. HUNT. Yes, sir. The proper safeguards in our view would be
giving access to books and records both to State regulatory authori-
ties and auditing powers, and access to, books and records of utili-
ties to the FERC.
We think that is necessary for FERC to look at affiliate trans-
actions, cross-subsidization, and for the States to have enough
power to audit the utilities in their particular States.
114
Mr. BARTON. And do you consider the provisions on H.R. 3406

with regards to the safeguards to be acceptable or appropriate, or
do you think we need to enhance them in some way?
Mr. HUNT. I think they are adequate, sir, but I would accede to
FERC on that issue, because they will be the ones at the Federal
level who would really have the power under the bill to audit the
books and records of the utilities.
Mr. BARTON. Okay. Chairwoman Hochstetter, do you think that
NARUC would ever support a Federal bill?
Ms. HOCHSTETTER. Well, certainly. It would just depend on the
language within the Federal bill.
Mr. BARTON. But we have to have a Federal system, and you are
looking at the most States rights chairman you are going to have
on this subcommittee, and I have bent over backwards to prevent
preemption of the States rights in almost every title of the bill.
And you are a very eloquent spokeswoman, but basically every-
thing in the bill to protect the States doesnt go quite far enough
to protect the States in your written testimony, which means that
if we go far enough, we dont have a Federal bill.
So if you were me, what would you do? Would you just throw up
your hands and say the heck with it, and let these great States
that have been out there for all these years squabbling among
themselves continue to squabble?
Or would you just pass a bill that says let FERC do it, instead
of letting the Congress do it, where you have a little input?
Ms. HOCHSTETTER. Mr. Chairman, honestly, there is much about
this bill that we can support, and I think if I were in your shoes,
I would ask NARUC for specific wording provisions, some specific
amendatory language that might be acceptable to the organization
and to individual States to address these particular preemption
concerns that I have identified.
Mr. BARTON. Well, we have been doing that for 3 years.
Ms. HOCHSTETTER. Well, we would certainly be happy to give an-
other go at it.
Mr. BARTON. And we will be happy to give you another go at it,
but we have got about a week to let you have a go at it. I did listen
with detail to what you said, and when you talked about a savings
clause, I think we can work on that.
I dont see a way around the RTO issue, and I just think it is
going to be real tough to create a national system if we dont
change to some extent the status quo at the State level on a fall-
back position on transmission siting.
And if I heard you correctly, you said that NARUC, that if the
States cant agree, instead of letting the FERC come in at the end
like we do, and let the FERC make the decision, your group appar-
ently wants to create some sort of a regional arbitration panel; is
that correct?
Ms. HOCHSTETTER. Mr. Chairman, the States have been engaged
in recent discussions with FERC on creating regional advisory pan-
els, or regional advisory boards, to work with FERC on RTO issues.
And I think that that mechanism with respect to RTO issues
could also work for transmission siting. And I also think that there
have been some approaches, particularly in the Western part of the
115
United States, where groups of States have worked together to

work through transmission citing issues.
In my part of the country, which is your part of the country as
well, I am not aware of any transmission projects that have not
been able to go forward. I think that these cases may be isolated
where there have been problems.
I think it may be a spotty thing, as opposed to a universal prob-
lem that needs a universal fix. So thats why I had respectfully
suggested that we may want to approach it in a more moderate
basis.
Mr. BARTON. Do you think that NARUC is willing to allow the
RTO body, once it is in power, to make the final siting decisions?
Ms. HOCHSTETTER. I think it is entirely possible, Mr. Chairman,
that if the States had a strong real formalized role in RTO govern-
ance decisions, then siting could become part of that process, yes,
sir. But it would depend upon the structure of our role, our ongoing
role with respect to RTO governance and operation.
Mr. BARTON. And, of course, our RTO proposal that is in the bill
gives the States that real authority in the RTO creation. You are
aware of that?
Ms. HOCHSTETTER. Thats correct.
Mr. BARTON. And you like that part of the bill?
Ms. HOCHSTETTER. Yes, sir. I think it is the ongoing involvement
on a day-to-day operational basis that we would like to see
strengthened in the bill.
Mr. BARTON. Thank you. My time has expired. The gentleman
from Virginia, Mr. Boucher.
Mr. BOUCHER. Thank you, Mr. Chairman. Ms. Hochstetter, I
share your view with respect to the need to retain State authority
over the siting of transmission lines, and frankly I dont think the
case has been made that States have abused their discretion to site
these lines in a way that would warrant this grant of Federal
siting authority.
So we are in agreement on that. Tell me if you would what some
of the concerns that States have to consider are when the decision
is made whether or not transmission lines should be approved?
Ms. HOCHSTETTER. Yes, sir. I am glad that you asked that ques-
tion. There are a number of things set out in our statute that we
must consider, in addition to getting the input of a number of other
State agencies.
There are citing issues involving historic property, landowners
rights, environmental quality, endangered species, and then on an
economic basis, there are cost benefit ramifications, in terms of
making sure that the infrastructure and its costs are in fact allo-
cated in a manner that provides benefits to those that pay the
costs.
Mr. BOUCHER. Are you aware of any instances cited by the pro-
ponents of this grant of Federal authority to site transmission
lines, where the claim has been made that the State has acted ar-
bitrarily in balancing these competing interests of new trans-
mission lines on the one hand, versus the other values that you
have mentioned on the other, that the State has not engaged in a
reasonable balancing process?
116
And that it has in some way its discretion to weigh these various
values and come to a decision? Are you aware of instances where
the allegation has been made of some abuse of discretion in that
regard?
Ms. HOCHSTETTER. I have honestly only heard of one antidotal
story, and I dont have much information or knowledge on it. And
so I did find it somewhat interesting that that was a proposal in
the legislation, because from my knowledge and experienceand I
have been in this industry for 17 yearsI am not aware of any line
that was necessary that has failed to be sited.
I am sure that there may be one or two examples, but I am not
aware of any.
Mr. BOUCHER. Okay. Well, I have been asking that question to
a number of witnesses who have been testifying before this sub-
committee this year, and we have yet to hear examples from any-
one that would suggest that States have acted inappropriately, and
would lend credence to the claim that there needs to be Federal au-
thority in this area.
And let me just ask one additional question, and that relates to
a way in which we might encourage the investments to be made
in new transmission lines where they in fact have to be built.
A number of proposals have been put forward to address that
concern. The bill contains a new system of incentive pricing au-
thorities for the FERC. I would welcome your view with regard to
the appropriateness of incentive pricing as a way to encourage and
incent new power line construction.
And I would also welcome your view with regard to whether or
not there might be another alternative. And that is sufficiently to
empower regional transmission organizations to bid out the con-
struction of these lines themselves.
And perhaps ultimately to be the owner of the newly constructed
lines. Your thoughts on that alternative and whether or not that
might work?
Ms. HOCHSTETTER. Yes, sir. Thank you. I am honestly not aware
of any examples, at least in my State and in my regional of the
country, where traditional cost of service based rate making has
not be sufficient to incent transmission owners to build new trans-
mission.
Certainly incentive rates might provide more encouragement and
inducements, but I am not aware of the fact that we are at that
point where that is absolutely necessary. I think it is something
that could be considered at some point.
But we do have to keep in mind that when you use a rate design
that it generally increases retail rates to consumers. So there is a
balancing act that has to go into the process, and I would think
that from a logical standpoint that you would start with the cost
of service basis for incremental transmission construction.
And if that didnt work, then move to something else, but I dont
think you have to jump over that first phase necessarily to get new
transmission constructed.
Mr. BOUCHER. Okay. Mr. Chairman, those are my questions.
Thank you very much.
Mr. LARGENT [presiding]. I thank the gentleman. The gentleman
from Illinois, Mr. Shimkus, is recognized.
117
Mr. SHIMKUS. Thank you, Mr. Chairman. I will have just a brief
question for Chairman Hochstetter. Define retail. In your state-
ment, you talked about retail issues. Define retail for me.
Ms. HOCHSTETTER. There are a couple of different definitions
that I might proffer. One is those program that have to do with
services provided off of the distribution facilities, which is what
State regulators regulate everything that is of a distribution na-
ture.
Another definition of retail might be those rates, programs, and
services offered to residential, commercial, and industrial cus-
tomers.
Mr. SHIMKUS. Is there not another definition of retail? Could
there not be retail over the transmission lines?
Ms. HOCHSTETTER. A portion of the transmission lines certainly
are involved in retail service, and of course from the standpoint of
the bundled service that we still have, a majority of the trans-
mission service is in fact retail.
Mr. SHIMKUS. Now, if we have a generating facility in Arkansas,
and a manufacturing plant in Missouri, by the Constitutional defi-
nition that would be interstate commerce would it not?
Ms. HOCHSTETTER. Thats correct, and based on my under-
standing, Missouri would have to have retail open access to allow
that manufacturing plant in Missouri to buy from the merchant
plant in Arkansas.
Mr. SHIMKUS. Okay. What about Illinois?
Ms. HOCHSTETTER. Then in that scenario, that plant or the man-
ufacturing plant in Illinois would certainly be free to purchase from
the merchant plant in Arkansas.
Mr. SHIMKUS. Would it not make an argument for our role in the
debate referencing interstate commerce to try to create that na-
tional grid as the chairman has so aptly attempting to do?
Ms. HOCHSTETTER. I agree that the division lines are somewhat
gray at times, because certainly the transmission commerce is a
mixture of retail and wholesale.
Mr. SHIMKUS. And I think that is probably the fundamental prin-
ciple of what we try to address here on this committee, and as the
committee Members have stated, this is the only committee really
defined by the Constitution that deals with interstate commerce.
It is really a tough argument to make these days that wholesale,
i.e., and some retail, are not interstate commerce and should be
kept solely for the jurisdiction of the control of the State, and thats
why we probably are going to move in some direction.
And we would rather that you be helpful than adversary, and
with that, Mr. Chairman, I yield back the balance of my time.
Mr. LARGENT [presiding]. I thank the gentleman. The gentleman
from Michigan, Mr. Dingell, is recognized.
Mr. DINGELL. Mr. Chairman, I thank you for your courtesy, and
I commend the chairman for this hearing. To the witnesses, I am
going to give you questions which I hope can be answered yes or
no.
Your testimony states this morning that repeal of the Act would
eliminate regulatory restrictions that prevent utility holding com-
panies from owning utilities at different parts of the country, and
to prevent non-utility businesses from acquiring regulated utility.
118
I interpret this as meaning that but for PUHCA, Enron could

have acquired regulated utilities. Is that correct?
Mr. HUNT. Mr. Congressman, I dont thinkthat may be correct.
Enron is exempt from PUHCA now because it does not operate a
utility outside of Oregon, where it is incorporated.
Mr. DINGELL. So they could then have bought it either way?
Mr. HUNT. They could have bought another utility outside of Or-
egon, and they would have probably become an interstate company
obviously, and been subject to the Act.
Mr. DINGELL. So if they bought one outside?
Mr. HUNT. Yes, sir.
Mr. DINGELL. So the answer to the question then is yes. Now,
lets look at the accounting in the Enron matter. It was celebrated
perhaps by meeting one of two tests. It was either incompetent or
it was criminal, or perhaps both.
Having said that, in that case, wouldnt you and I now be sitting
here discussing how State regulators would be faced with the mas-
sive job of shifting through Enrons extraordinarily complex cor-
porate structures where evidence of cross-subsidization of non-en-
ergy investments financed by captive utility consumers?
Mr. HUNT. Mr. Congressman, as you know, my agency has just
begun a serious investigation of the Enron matter, and it would be
difficult for me to speak either about the accounting issues or any-
thing specific about Enron until we have all the facts with respect
to our investigation.
Mr. DINGELL. Well, would you not now then be in a situation of
rubbing around through Enrons accounting to find whether or not
there was evidence of cross-subsidization of non-energy invest-
ments being made by charging captive utility consumers for the
costs of that?
Mr. BARTON. After he answers the question would the gentleman
yield?
Mr. DINGELL. I would be happy to yield for the Chair. But isnt
that a real possibility, and you would be here discussing that with
me this morning?
Mr. HUNT. Sir, the SECs Office of Chief Accountant is going to
look very seriously at, and our other accountants are going to look
very seriously and note, all the ramifications of the accounting
problems as they relate to Enron.
And I am not going to guess as to what they are going to find,
but they will be looking at the whole accounting issue with respect
to Enron.
Mr. DINGELL. I am not asking for that answer. All I am doing
is saying we would have been in the awkward position then of
probably having to be looking to see if Enron was using captive
utility consumers payments to subsidize cross-fertilization of in-
vestments; isnt that right?
Mr. HUNT. That is a possibility, as I said, Mr. Congressman.
They only own one utility.
Mr. DINGELL. And as you have already told me, but for PUHCA,
they could have bought more?
Mr. HUNT. Yes.
Mr. DINGELL. Now, in the light of what we are now learning, is
the SEC confident in its earlier contention that the books and
119
records protection is an adequate legislative offset for repealing

PUHCA?
Mr. HUNT. I think that FERC would be better able to handle
that. They are the ones that we would suggest should have the
books and records authority at the Federal level.
Mr. DINGELL. Isnt it fair to observe that on securities matters
that the SEC is the premier and the major, and the principal Fed-
eral Agency dealing with securities matters?
Mr. HUNT. Yes, sir.
Mr. DINGELL. And PUHCA is, of course, a twofold responsibility
of the Federal Government; a part deals with energy, but more im-
portantly, a part, or the principal part, deals with securities be-
cause it was directed at dealing with the outrages committed by
Mr. Ensel in the 1920s; isnt that right?
Mr. HUNT. Yes, sir.
Mr. DINGELL. Very good. I thank you. Mr. Chairman, I am happy
to yield to you.
Mr. BARTON. I thank you, Congressman. You know, I was talking
to the staff when you started your question, and so I may have
missed the premise. But my understanding is that Enron is not a
public utility holding company under the PUHCA.
So that what Mr. Dingell was asking you was really more of a
hypothetical question than a real time question, because they are
not subject to PUHCA.
Mr. HUNT. They are not subject to PUHCA, because they only op-
erate utilities in one State, the State in which they are incor-
porated.
Mr. BARTON. And if they had been a PUHCA regulated company
would their books have been looked at in any more detail than they
should have been looked at under the reality of how they have been
regulated or been reviewed by the SEC?
Mr. HUNT. Well, the
Mr. BARTON. The gentleman has yielded to me to let you have
a pop at answering my question.
Mr. HUNT. I think that certainly I cant see anything different,
Mr. Chairman, with respect to the relationship between the outside
auditors and the company itself.
Mr. BARTON. I would ask for unanimous consent that the gen-
tleman from Michigan be given an additional 2 minutes since he
yielded to me on his last 15 seconds, and obviously I have peaked
his interest by my question.
Mr. DINGELL. Mr. Chairman, I thank you, and you have helped
with the point. But the point that we come down to is under
PUHCA the Enron folks had one utility, and the Enron folks could
not under PUHCA have owned, or bought, or acquired a second
utility in another State.
And in that PUHCA precluded certain fine possibilities of serious
misbehavior by the Enron folks then; isnt that true?
Mr. HUNT. Sir, they could not have acquired a utility in another
State without coming under the SECs jurisdiction under PUHCA.
Mr. DINGELL. Right. So that would have had the practical effect
then of preventing them from diversifying, right?
Mr. HUNT. They may not have minded being under PUHCA, sir.
120
Mr. DINGELL. And adding a splendid new level of complexity to

some of the most obscure, murky, perhaps incompetent, or more
perhaps a plainly dishonest aggregation of corrupt bookkeeping;
isnt that right?
Mr. HUNT. I cant say whether it was corrupt or not, Mr. Con-
gressman, because we have not completed our investigation.
Mr. DINGELL. Well, if it looks like a duck, and quacks like a
duck, and flies a duck, let it be said that it is a duck. And I think
here, dear friends, that we have before us a duck, or more cor-
rectly, an incorrect, incompetent, dishonest, and embarrassing
bookkeeping.
Mr. SAWYER. Will the gentleman yield?
Mr. DINGELL. I am happy to yield to the gentleman if he wants
to talk about this correct, incompetent, bookkeeping.
Mr. SAWYER. I just wondered. You do have some experience in
duck hunting dont you?
Mr. DINGELL. I do. I also have some experience in correct and
dishonest bookkeeping.
Mr. SAWYER. Truly as an observer, Im sure.
Mr. DINGELL. It is from observation and not from engaging in the
practice. Mr. Chairman, as always, you are courteous and kind,
and I thank you for your graciousness.
Mr. LARGENT [presiding]. The gentlemans time has expired. I
recognize the gentleman from Kentucky, Mr. Whitfield, for ques-
tions.
Mr. WHITFIELD. Mr. Chairman, actually, I am not going to ask
any questions today.
Mr. LARGENT. Okay. All right. Then the Chair will yield to him-
self, as I am next in line here, and I have just one question. Actu-
ally, one comment and a question.
Mr. Hunt, I wanted to ask you, is it possibleand kind of fol-
lowing up on Mr. Dingells line of questioning, if PUHCA had been
repealed and Enron had gotten into more diverse utility company
holdings, is it not possible that it would have raised Enron to an-
other level of scrutiny by the SEC or by FERC that perhaps would
have kept Enron out of trouble?
And I know that we are projecting into the future here, and
thinking about possibilities, but it is my belief that perhaps if
PUHCA had been repealed and Enron had gotten into where they
held more than one utility company, that possibly they could have
been scrutinized to a greater degree, and thereby avoiding some of
the problems that they now find themselves in?
Mr. HUNT. Well, we would certainly hope that if PUHCA had
been repealed FERC would have been given more power to exam-
ine the books and records of a company in the situation of Enron,
particularly if they bought utilities outside of Oregon where they
now own a utility.
So we would hope that FERC would expand its authorities and
would have given close scrutiny to a company like that with its
new powers.
Mr. LARGENT. Thank you, Mr. Chairman. Ms. Hochstetter, I
would like to ask you a question. I was surprised a little bit by
your response about cost of service rates, and that those are good
enough to construct transmission.
121
Is it your belief that we have a shortage of transmission in this

country today?
Ms. HOCHSTETTER. I believe it depends upon what type of trans-
mission service you are talking about.
Mr. LARGENT. I am talking about interstate transmission.
Ms. HOCHSTETTER. To serve the bulk wholesale power market, it
is my understanding that that is correct. I dont know that there
is a constraint, at least in my part of the country, with respect to
serving native load customers. But certainly the system is not con-
figured in such a manner to serve the bulk wholesale power mar-
ket.
Mr. LARGENT. So we are talking about interstate transmission,
which is what we are talking about here in Washington, that you
believe that there is a shortage in transmission to serve the bulk
power grid?
Ms. HOCHSTETTER. Capacity. Maybe not necessarily a situation
where you automatically have to go toward constructing new lines.
But there are obviously as you know ways to enhance capacity
without building new lines, and siting new transmission lines.
But I am certainly aware of and would acknowledge the fact that
we will need incremental transition capacity, and probably lines in
this country. But I am not necessarily convinced that incentive rate
making is the first necessary step.
Mr. LARGENT. Well, we have heard stories and perhaps you
havent, of constraintsyou know, Path-15 is one that we have
heard a lot about in California, where there is a significant trans-
mission constraint, intrastate constraint in California.
We have heard of constraints in Wisconsin and Illinois, between
Chicago and Milwaukee, that there is serious constraints of trans-
mission there. And I am just wondering if you feel like that the
I mean, your opinion is that cost to service rates are good enough
for transmission construction today, then why arent those trans-
mission lines where there are constraints being constructed?
Ms. HOCHSTETTER. I think honestly, sir, one of the reasons is
that because everyone is waiting to make investments until the
RTO structure is a known quantity, and RTOs are actually imple-
mented, and up and running.
I think people are delaying making investments until they know
what that type of organization is going to look like. And what also
the transmission pricing policies will be coming out of FERC.
You know, they have an interconnection note going on right now,
the second phase of which will deal with incremental transition
pricing policies. So I think that once we have the RTO system con-
figured, and these new transition pricing policies, I think you will
see folks stepping up to the bar and making transmission infra-
structure investments.
Mr. LARGENT. Let me ask you a question about RTOs. I sat here
when you were talking about that, and I had actually wanted to
ask some of the panelists that we had yesterday this question.
How involved should FERC be in determining the size or number
of RTOs in this country?
Ms. HOCHSTETTER. I think they should be very involved, and I
think they should be involved in a partnership format with the
122
States, which is a step that they had taken, and we commend them
greatly for doing that.
We have over the last few months begun to forge that type of
partnership in an ongoing dialog with them on RTO issues.
Mr. LARGENT. Is less better in terms of the number of RTOs?
Ms. HOCHSTETTER. I honestly think it is a region specific ques-
tion, and I think that Chairman Wood has recognized that, and I
think that they have recently changed their position on four being
the perfect number. So I think it is one of those things that has
to be looked at on a region by region basis.
Mr. LARGENT. Okay. I see that my time has expired. Lets see.
The Chair recognizes the gentleman from Ohio, Mr. Sawyer, for
questions.
Mr. SAWYER. Thank you very much, Mr. Chairman. In light of
the exchanges, Commissioner Hunt, let me just return to what I
think Congressman Barton asked earlier. You make a very specific
recommendation with regard to what you believe the role between
the SEC and FERC ought to be with regard to affiliate trans-
actions, audits, access to books, records, and continued protection
of utility companies.
Do the provisions of the bill before us, 3406, satisfy your rec-
ommendations?
Mr. HUNT. I think so, Mr. Congressman. Obviously, you should
also get the views of FERC, and whether they think that this
power is adequately amplified in this bill for them to do the job,
because we would beif we had our way, we would be out of this
business, and this business would belong to FERC.
Mr. SAWYER. Let me just make an observation before I move on.
It strikes me that looking to the kinds of traditional solutions pro-
vided either by the SEC or FERC with regard to Enron may not
be where we need to look.
It strikes me that Enron structured its business to operate in the
seams between the controls put in place 65 years ago, and that
those controls may not have been adequate even in the best of cir-
cumstances, but that is just an observation.
Mr. HUNT. I think part of that business was unregulated by us
and by FERC, the trading part of the business. We regulate an-
other part and FERC regulates another part, but as to the trading
part, I think you are right. Neither of us regulates it under existing
law.
Mr. SAWYER. It is good to see you here today.
Mr. HUNT. Its good to see you, too, sir.
Mr. SAWYER. Ms. Hochstetter, I guess I would agree with Mr.
Boucher and with you with regard to the way in which the States
have functioned, and I think to suggest that they acted arbitrarily
or inappropriately, or abused discretion with regard to siting re-
sponsibilities that they have, it is an accurate observation to say
that those kinds of things have simply not occurred.
And I think it is probably also true that any transmission that
has been neededI cant think of a circumstance anywhere in the
country where it has been ultimately denied as a product of siting
difficulties.
Our problem it seems to me, however, is that not just recently,
and not just waiting for RTOs to come into place, but over the last
123
quarter of a century, we have seen a decline in investment, in over-

all transmission.
And that a transmission system designed to serve a cost of serv-
ice environment, and with an obligation to serve a service territory,
has worked.
But it has not created the broader grid of the kind that the Sit-
ting Chair was suggesting, and that the decline year in and year
out of over $100 million in investment in transmission has led to
a system that over the long term has begun to atrophy in terms
of the uses to which it has attempted to be put today.
That is to say, that for the bulk transmission and the functioning
of a real grid in regional markets instead of a series of trans-
mission lines cobbled together to meet the needs of a grid.
Having said that, could you describe for me the kind of RTO or
kind of regional siting authority that you are talking about? Would
it function within an RTO?
Would it have the authority to bring eminent domain to difficult
siting decisions in the same way that the States can today? And
when there is disagreement between existing siting authorities
among States, who resolves it?
Ms. HOCHSTETTER. I think, sir, the vision that I had mentioned
earlier on a regional basis would probably have to by law involve
voluntary cooperation and coordination as the first step.
I am not certain that regional eminent domain authority is some-
thing that is appropriate. But I certainly think that a regional as-
sociation of some sort, hand-worked through a majority, if not all
of the difficulties, and should at least be a first step, a first effort
that is made.
And to the extent that either an RTO isnt the one siting the au-
thority or to the extent that the States cant achieve that.
Mr. SAWYER. When Arkansas confronted a difficult siting deci-
sion, you mentioned that you had an obligation to look at a number
of questions, and included among those was whether or not it pro-
vides service to the people affected by the siting decision.
If in fact this is an interstate transmission line, and Arkansas
disagrees with Texas and Louisiana, for example, how does that get
resolved under the structure that you envision?
Ms. HOCHSTETTER. Well, I certainly recognize that you are not
going to have a perfect scenario and that there could be problems.
I think what I am just suggesting is that lets not jump over the
first couple of alternative methods in getting to the ultimate objec-
tive.
I certainly acknowledge, and I am just speaking on behalf of the
Arkansas Commission at this point, I will certainly acknowledge
that at some point FERCs siting authority, or some kind of FERC
backstop, might be appropriate and might be necessary.
But I dont think that you have to automatically go to that as
your first approach, the first step if you will, in doing that if you
like.
Mr. SAWYER. I would just submit that I believe that at least both
the bill that the chairman has worked on, and the one that I have
does give primary initial siting authority and sufficient time for the
States to act directly.
124
But that that backup authority is put in place not as a first use,
but in anticipation of potential problems.
Mr. BARTON. Would the gentleman yield?
Mr. SAWYER. With whatever I have left, I would be happy to.
Mr. BARTON. I would ask for unanimous consent that Mr. Sawyer
have 2 minutes, and if you would yield 1 minute to me.
Mr. SAWYER. I would be pleased to do so.
Mr. BARTON. Lets use that hypothetical. Lets say you have a
three State COMPAC, and Arkansas is right in the middle, and so
we have Oklahoma and Tennessee, and we have this regional citing
authority that you talked about.
And the regional citing authority has got one representative from
the State of Arkansas, and one representative from the State of
Oklahoma, and one representative from the State of Tennessee.
And the pending transmission line is an interstate line that goes
from Oklahoma to Tennessee across the great State of Arkansas.
The regional siting authority meets and it votes 2 to 1 to build it,
the one vote being the State of Arkansas, and it says that we dont
need it, and we dont get anything out of it, and we vote no.
If we went to that regional siting authority could we put lan-
guage in the regional siting authority that would bind the losing
State, the losing State, to exercise their State eminent authority,
right of eminent domain, even if they lose? Would NARUC accept
that?
Ms. HOCHSTETTER. Well, without checking with the NARUC offi-
cers and the NARUC board, I would have to say that I honestly
dont know. It is an interesting hypothetical, and
Mr. BARTON. Well, would you accept that? If you were the Com-
missioner representing the State of Arkansas in this three State
COMPAC, and you voted no, but the other two States voted yes,
and we were giving that State COMPAC the right to make the de-
cision and not the FERC, would you accept that kind of a provision
acting on behalf of the State of Arkansas?
Ms. HOCHSTETTER. I honestly dont know. I think I would have
to look at to what extent, if any, there was an impact on retail
rates.
Mr. BARTON. No, I am not talking about that. We are going to
do something.
Ms. HOCHSTETTER. I understand, sir.
Mr. BARTON. We are going to get a national grid built, one way
or the other. I want the States to have every bit of access and au-
thority, and input possible, but at some point in time somebody has
got to pull the trigger so to speak and say we are going to build
it if it is in the regional interest.
Now, you put on the table this regional authority and that is not
a unique brand new idea.
Ms. HOCHSTETTER. Right.
Mr. BARTON. I am willing to go down that road if I can get your
group and your utility commissioners to accept that at some point
in time, even acting on behalf of your State, that you vote no, and
you still accept the overall product for the greater good.
But if you wont accept that, if NARUC wont accept that, then
we will keep our backup authority at the FERC level.
125
Ms. HOCHSTETTER. Well, let me answer you on behalf of the Ar-

kansas commission, because I honestly cannot speak based on your
hypothetical on behalf of NARUC. Our Commission does not want
to be parochial, and that is one of the reasons that we have been
a strong advocate of RTOs at FERC.
And I think that we are somewhat unique, at least in our part
of the country, in our support of the RTO concept. Along these
lines
Mr. BARTON. You have got some of the biggest merchant plants
in the country being built in your State.
Ms. HOCHSTETTER. Yes, sir.
Mr. BARTON. And you want to get that power out there.
Ms. HOCHSTETTER. Provided that we get some benefit out of that,
thats correct. But the concept of net public interest is near and
dear to my heart and to our Commissions heart.
And if you are looking at something on a regional basis and the
net public interest shows that the majority of the folks will benefit
from the project, I personally do not have a problem with that, and
I dont think our Commission would.
Mr. BARTON. I will take that.
Mr. LARGENT [presiding]. The gentlemans time has expired. I
recognize the gentleman from Tennessee, Mr. Bryant.
Mr. SAWYER. Mr. Chairman, I yielded 1 minute of my 2. Can I
have 1 minute as long as his?
Mr. LARGENT. Sure.
Mr. SAWYER. Well, probably not. Okay. Forget I asked.
Mr. BARTON. I am reinforcing your point, Mr. Sawyer.
Mr. BRYANT. Thank you. Madam Chairman, let me follow up on
that, and not to beat a dead horse here, but this is a very impor-
tant issue. Coming from the State of Tennessee, let me assure you
that we probably would not vote against Arkansas in that scenario.
Ms. HOCHSTETTER. I appreciate that.
Mr. BRYANT. But we could always run it through Texas, or per-
haps Missouri. This question though is that there is no question
that the President and his energy policy, and the report indicated
that we needed more infrastructure, and I dont think that is the
issue here.
It is how we go about it, and by protecting States rights, and re-
gional rights, and even individual property owners rights as we
talk about this process. And I am interested in your testimony as
it relates to the incentive pricing.
And a couple of times you have referred to in your statement or
in your testimony today about not leaping over the cost of service
and going right to the incentive pricing because ultimately we all
know the rate payer is going to be charged with this.
And not necessarily seeing a direct visible benefit out of that, it
is going to be difficult to accept. It is going to be very difficult in
the Tennessee Valley, where we have become accustomed over the
years to very reliable and inexpensive power, particularly to our
residential customers and our constituents.
As we move toward this restructuring my constituents are very
concerned about prices going up. So every point that is out there
where this court occur, I know that the blame for that is going to
126
come back to restructuring in general, and those in Congress re-

sponsible for it.
And I am a rate payer also, and so I dont want to see that ei-
ther. So I am intrigued that if there is truly a middle ground so
that we dont leap over and go right to the incentive pricing.
But my question to you though is realisticallyand I have al-
ways heard that that isthat people are waiting for Congress to
act to provide some stability before they start building and put-
ting money, and investing money in infrastructure.
Can we say how we would get there without incentive pricing?
I mean, how do you say that we are not going to start out with
this, but if it doesnt work, we will get to that, because everybody
is going to hold out until it gets to that point?
I mean, how do you reasonably get some interim steps in there
that would actually work, rather than people continuing to hold out
on building until they get the money that they want to build?
Ms. HOCHSTETTER. Yes, sir. I think that FERC is ultimately
going to need to take a lead in that, and so I think in terms of
waiting for Congressional action, it is probably waiting for Congres-
sional action to ask FERC to move forward in coordination and in
consultation with the States to address some of these issues.
But I think that is something that could be done in a proceeding
at FERC to discuss that type of cost of service, versus incentive
rate design, and work through those issues in this consultative
process that we have begun to form with the FERC.
So I think that is something that could be handled on an admin-
istrative basis, as opposed to in Congressional legislation, just to
direct us to move forward in partnership, the States, in conjunction
with FERC on these issues.
Mr. BRYANT. I have additional time, but I know there is a very
qualified and competent second panel ready to testify, and I would
waive the balance of my time so we can move on toward our second
panel.
Mr. LARGENT. All right. The gentleman yields back his time, and
I will recognize the gentleman from Louisiana, Mr. John.
[No response.]
Mr. LARGENT. Mr. Wynn, from Maryland.
[No response.]
Mr. SHIMKUS. Mr. Chairman, I have one additional question, but
I am not up yet.
Mr. LARGENT. Well, maybe Mr. Walden would yield you time.
Mr. Walden. Mr. Chairman, I would be happy to yield to my col-
league.
Mr. SHIMKUS. And I thank my colleague. For Mr. Hunt. I have
been told from some Illinois utilities PUHCA has prevented them
from refinancing bonds. Could this be true?
Mr. HUNT. Without knowing the facts of that case, Mr. Congress-
man, I couldnt answer, but I would be glad to get back to you with
an answer.
Mr. SHIMKUS. Well, I dont question them, but the final question
is if they do have an inability to refinance bonds under PUHCA at
this time, understanding how rates have gone, we could then make
a correlation that individual rate payers are not getting the advan-
tage of the ability to refinance, and in essence are incurring higher
127
rates than they probably are, unless they were able to refinance.
Is that a fairly good analysis?
Mr. HUNT. Well, I just dont know what PUHCAs involvement
in that problem is, Mr. Congressman. Certainly if a utility cant re-
finance, the rate payers may suffer some harm. But to the extent
that PUHCA and we had anything to do with the non-refinancing
in this instance, I cant speak to that because I dont know the
facts.
Mr. SHIMKUS. And if you would check to get that, I would appre-
ciate that.
Mr. HUNT. I will try.
Mr. SHIMKUS. That is the only question I have, Mr. Chairman.
Thank you.
Mr. LARGENT. The gentleman from Oregon, does he yield back
his time? Do you have any questions?
Mr. WALDEN. I will save mine for the next panel, Mr. Chairman.
Mr. LARGENT. Okay. The gentleman from Georgia, Mr. Norwood.
Do you have any questions for this panel?
Mr. NORWOOD. No questions.
Mr. LARGENT. Seeing no other requests for questions, I will ex-
cuse this panel. Thank you, Mr. Hunt, and Ms. Hochstetter, I ap-
preciate your testimony, and we will ask the next panel to come in.
Ladies and gentlemen, we thank all of you for your willingness
to testimony before this committee. I would ask you to summarize
your remarks in 5 minutes, and I will begin by introducing Panel
Two.
They are David Sokol, representing Mid-American Energy Hold-
ings Company; Mr. Robert Johnston, representing the Municipal
Electric Authority of Georgia; Mr. Alan Richardson, representing
the American Public Power Association; Mr. Glenn English, an
Oklahoman, also representing the National Rural Electric Coopera-
tive.
And Mr. Michehl Gent, representing the North American Electric
Reliability Council; Ms. Lynne Church, representing the Electric
Power Supply Association; Mr. James B. Rouse, representing the
Electric Consumers Research Council; Charles Acquard, rep-
resenting the Consumers for Fair Competition; Mr. William
Prindle, representing The Alliance to Save Energy; and finally Mr.
Leonard Hyman, representing or with Salomom Smith Barney.
As I said, we welcome you and we will begin with Mr. Sokol to
present your testimony in 5 minutes, and then we will move
through the panel.
Thank you, Mr. Sokol.
128
STATEMENTS OF DAVID L. SOKOL, CHAIRMAN AND CEO, MID-
AMERICAN ENERGY HOLDINGS COMPANY; ALAN H. RICH-
ARDSON, PRESIDENT AND CEO, AMERICAN PUBLIC POWER
ASSOCIATION; GLENN ENGLISH, CEO, NATIONAL RURAL
ELECTRIC COOPERATIVE; MICHEHL R. GENT, PRESIDENT
AND CEO, NORTH AMERICAN ELECTRIC RELIABILITY COUN-
CIL; LYNNE H. CHURCH, PRESIDENT, ELECTRIC POWER SUP-
PLY ASSOCIATION; JAMES B. ROUSE, DIRECTOR, ENERGY
POLICY, PRAXAIR, INC., ON BEHALF OF THE ELECTRICITY
CONSUMERS RESOURCE COUNCIL; CHARLES ACQUARD, EX-
ECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF STATE
UTILITY CONSUMER ADVOCATES; WILLIAM R. PRINDLE, DI-
RECTOR OF BUILDING AND UTILITIES PROGRAMS, THE AL-
LIANCE TO SAVE ENERGY; LEONARD S. HYMAN, SENIOR IN-
DUSTRY ADVISOR TO SALOMON SMITH BARNEY; AND ROB-
ERT JOHNSTON, PRESIDENT AND CEO, MUNICIPAL ELEC-
TRIC AUTHORITY OF GEORGIA, ON BEHALF OF THE LARGE
PUBLIC POWER COUNCIL
Mr. SOKOL. Thank you, Mr. Chairman, for the opportunity to be
here today. I am David Sokol, Chairman and CEO of Mid-American
Energy Holdings Company, and my comments are fully endorsed
today by our largest shareholder, Warren Buffett, and his Berk-
shire Hathaway Company.
Before providing comments on H.R. 3406, I would like to explain
why we believe that moving forward with this legislation is so cru-
cial. As the head of a company that provides the electrical load that
feeds industry jobs and production, we have seen a very steady
downward trend for much of this year that has accelerated in re-
cent months.
We do not share the view of some who believe that this recession
is destined to be either relatively brief or comparatively painless.
Congress does, however, have in its power to take the steps that
will spur the economy and reassure investors and consumers in
this sector.
Passing real comprehensive energy legislation, a bill that con-
tains electricity modernization as a fundamental component is vital
to that effort.
This perhaps could be one of the most important stimulus meas-
ures this committee can pass for the American economic recovery.
With regard to the bill, I would like to offer my comments section
by section, and under Title One of Electricity Supply, Subtitle A,
Mid-American fully supports this section.
Tough Mid-American does not have a financial stake in this area,
we believe that distributed generation should be an integral part
of the energy future of this country, and will deliver significant
benefits to consumers and the environment.
We have some minor technical concerns on the net metering lan-
guage, but establishing minimum standards to encourage States to
adopt policies to promote generalization and with renewables is
clearly appropriate.
Under Subtitle B regarding the Public Utility Holding Company
Act, Mid-American strongly supports repealing PUHCA and replac-
ing it with comprehensive provisions to enhance regulatory access
to the books and records of all utility holding companies.
129
PUHCA is the most substantial impediment to new investments

and energy infrastructure, keeping billions of dollars of new capital
out of this industry. The SEC, FERC, State Regulators, the admin-
istration, and the Democratic leadership of the Senate, have all en-
dorsed PUHCA repeal as necessary pieces of a national energy
strategy.
It is in the words of your former colleague, Senator Tom Carper
of Delaware, a no-brainer. Subtitle C provisions regarding the
Public Utility Regulatory Act, we strongly support these provisions
as well, and we note that respective PURPA repeal is long enjoyed
by partisan support.
Under Subtitle D, the redundant review of certain matters. Sec-
tion 142 eliminates the redundant review of multiple agencies over
utility mergers. This is a desirable provision, but I understand that
there is significant opposition to certain parts of the section.
At a minimum, we would recommend establishing reasonable
time limits on the FERC merger review period. Under Title II,
Transmission Operations, Section 201 embodies the FERC like
compromise, bringing non-jurisdictional utilities under limited
FERC oversight.
Mid-American was one of the first investor-owned utilities to en-
dorse this compromise and we support this section strongly. Section
202 on regional transmission organizations, or RTOs, includes
many items that have been sought for years by advocates of a more
transparent transmission system.
First, a date certain for RTO participation; and second, placing
all uses of the system under the same tariff; and, third, independ-
ence requirements and minimum standards for RTOs.
The principles underlying this language is very sound; manda-
tory participation with flexible implementation. At the same time
we understand that this section has received some criticism that it
is too cumbersome, and perhaps too prescriptive.
We would suggest the work continue on the section as the bill
moves forward through the process in order to refine these very
sound concepts. Under Title III of transmission reliability, Section
301 is a streamline version of the reliability language that has
been included in earlier bills.
This language has broad stakeholder support, and Mid-American
supports and prefers this approach, and we could also accept the
section on reliability in the Daschle and Bingaman bill.
The most important thing is that we must have a mandatory, en-
forceable, reliability system in place. Under transmission infra-
structure, Section 401 addresses two priority issues for improving
the transmission infrastructure.
Encouraging FERC to develop incentive rates for investments
and new infrastructure, and requiring FERC to conduct a rule-
making on pricing to ensure adequate capitalization of stand-alone
transmission entities.
These provisions are sound policy, and frankly shouldnt be con-
troversial. Some of the other policy directives toward FERC we
would characterize as clearly desirable, but not absolutely essen-
tial, and non-binding language could be appropriate.
Under Section 402, this is a very important section. Performing
siting of interstate transmission lines is an issue that only Con-
130
gress can address. Every electricity consumer has a stake in fixing

transmission bottlenecks, and making for a more wholesome trans-
mission system.
While my first instincts would usually be unfettered protection
of property rights, there must be some way to ensure that vital
transmission infrastructure gets built for this country.
The formula that you have outlined will do the job, and we would
encourage the committee to continue exploring options with the
various stated entities involved.
Under Federal Utilities, we understand that these three sections
represent consensus approaches by the stakeholders in the affected
regions, and while we are not an expert on these issues, we com-
mend that consensus approach.
And Mid-American strongly supports Title VI and VII of the Con-
sumer Protection and related matters. Mr. Chairman, there is one
other topic that I would like to address before I conclude, and that
is the problems at Enron.
No one should make Enron or the Enron situation an energy
issue. It is an issue of bad investments and the clear misuse of ac-
counting. Energy markets are functioning fine without Enron.
This committee has a great history on matters of oversight inves-
tigations, and we applaud Chairman Tauzin on announcing his in-
tentions to hold hearings on this matter. I also believe that Rep-
resentative Markey has raised valid questions about the oversight
of electricity trading markets that deserve the committees atten-
tion.
But the subcommittee should not turn away from the task of
doing its part to aid the economic recovery modernizing the vastly
needed electricity laws and infrastructure because of the problems
at one company, no matter how high profile that company is.
The changes that you are proposing under 3406 are very long
overdue, and I would be happy to answer any questions that you
might have.
[The prepared statement of David L. Sokol follows:]
PREPARED STATEMENT OF DAVID L. SOKOL, CHAIRMAN AND CEO, MIDAMERICAN
ENERGY HOLDINGS CO.
Thank you, Mr. Chairman, for the opportunity to testify today. I am David L.
Sokol, Chairman and CEO of MidAmerican Energy Holdings Company, a global en-
ergy company based in Des Moines, Iowa. I was pleased to testify before the Sub-
committee earlier this year on the topic of barriers to competitive generation, and
am appreciative that the subcommittee has allowed me to come back.
MidAmerican is a diversified, international energy company headquartered in Des
Moines, Iowa with approximately $11 billion in assets. The company consists of four
major subsidiaries: CE Generation (CalEnergy) a global energy company that spe-
cializes in renewable energy development in California, New York, Texas and the
West, as well as the Philippines; MidAmerican Energy Company, an electric and gas
utility serving the states of Iowa, South Dakota, Illinois and a small part of Ne-
braska; Northern Electric, an electric and gas utility in the United Kingdom, and
Home Services.com, a residential real estate company operating throughout the
country.
As head of a company that includes both regulated utility assets and independent,
competitive generation assets, in addition to experience participating in the already-
deregulated energy markets in the U.K., I hope I bring a balanced perspective to
the consideration of these issues.
For the last three years, MidAmerican has taken a leadership role in attempting
to build support for reasonable, middle ground solutions to modernizing the elec-
tricity industry.
131
In that spirit, I will attempt in my testimony to point out some areas of potential
compromise that could resolve outstanding disagreements over the few remaining
areas of dispute in this legislation. It is time for all stakeholders to engage to help
resolve these issues. To do otherwise only serves the interest of those who seek to
gain advantage from the existing inefficiencies in the system at the expense of en-
ergy consumers.
Mr. Chairman, in addition to your leadership in this area, I have been impressed
by the commitment of both Secretary Abraham and the Democratic leadership of the
Senate to ensuring that electricity modernization is a core component of our na-
tional energy strategy. They recognize that attempting to create a twenty-first cen-
tury energy policy without modernizing electricity laws is akin to trying to install
a high-speed rail system on seventy year-old tracks.
Before providing comments on H.R. 3406, I would like to explain why I believe
moving forward with this legislation is so critical.
As the head of a company that provides the electric load that feeds industry, jobs
and production, I have seen a steady downward trend for much of the year that has
accelerated in recent months. I do not share the view of some who believe that this
recession is destined to be relatively brief and comparatively painless.
Congress does, however, have it in its power to take steps that will spur the econ-
omy and reassure investors and consumers. Passing real comprehensive energy leg-
islationa bill that contains electricity modernization as a fundamental compo-
nentis vital to that effort. This perhaps could be one of the most important stim-
ulus measures this committee can pass for American economic recovery.
With regard to the bill, Id like to comment section-by-section:
Title I: Electric Supply
Subtitle AInterconnection, Net Metering and Demand Management
MidAmerican supports this section.
I believe distributed generation should be an integral part of our energy future
and will deliver significant benefits to consumers and the environment. The provi-
sions in H.R. 3406 refine the principles of a stakeholder compromise between trans-
mission and distribution owners and independent generators that will bring greater
clarity and certainty to the interconnection process.
I know that there is some concern about addressing distribution interconnection
in this section, but members should be aware that this section only mandates that
a national technical standard be established where feasible and that generators pay
the reasonable costs of interconnection. I would recommend a technical change to
the bill to clarify the section on back-up power that we will provide to the committee
staff.
The language on net metering should not overturn existing state net metering
policies, but should establish minimum standards to encourage states to adopt poli-
cies to promote remote generation with renewables. Net metering will create some
cost shifting to customers who are not net metered under the rate design used by
most utilities today. These costs are for services that would otherwise be billed
based upon the net metered customers meter registration, but net metering elimi-
nates that registration. Such costs include transmission and distribution service,
billing and other customer services, taxes and system benefits charges. Determining
the means for recovering these shifted costs is best left to the states.
Subtitle BProvisions Regarding the Public Utility Holding Company Act
of 1935
MidAmerican strongly supports repealing PUHCA and replacing it with com-
prehensive provisions to enhance regulatory access to the books and records of all
utility holding companies.
PUHCA is the most substantial impediment to new investment in energy infra-
structure, keeping billions of dollars of new capital out of this industry. The SEC,
FERC, state regulators, the Administration and the Democratic leadership of the
Senate have all endorsed PUHCA repeal as a necessary piece of the national energy
strategy.
PUHCA places a set of arbitrary and often counter-productive limitations on in-
vestments in the regulated energy industry. It keeps new capital and new ideas out
of the industry at a time when transmission infrastructure alone requires tens of
billions of dollars in new investment. PUHCA requires the concentration of utility
assets because of its physical integration standard, increasing concerns about mar-
ket power.
PUHCA is an impediment to bringing new capital and new infrastructure into
Californias market because no entity that owns more than ten percent of any utility
in the eastern two-thirds of the country could make a significant capital investment
132
in those companies or in regulated assets such as new transmission without running
afoul of PUHCA. And, finally, PUHCA provides a first bite advantage to foreign-
owned corporations seeking to acquire American utility assets.
Replacing PUHCA with up-to-date provisions that provide state and federal regu-
lators with enhanced access to the books and records of all utility holding companies
is, in the words of your former colleague, Sen. Tom Carper of Delaware, a no
brainer.
Subtitle CProvisions Regarding the Public Utility Regulatory Policy Act
of 1978
MidAmerican strongly supports these provisions and notes that prospective repeal
of PURPAs Sec. 210 mandatory purchase requirement with full guarantee of cost
recovery has long enjoyed bipartisan support.
Through our CalEnergy subsidiary, MidAmerican owns geothermal energy facili-
ties that are QF producers. While PURPA has played an important role in opening
up wholesale electricity markets, there have been cases where QF contracts antici-
pated higher levels of avoided costs than market conditions actually produced. At
the same time, Im pleased to note that the recent settlement in California between
QF producers and one of the states largest utilities will provide consumers clean,
renewable electricity at a fraction of the cost of many of the long-term contracts for
conventional generation signed by the state.
Virtually every state in the country is looking at more market-based methods of
promoting renewable energy, and the PURPA Sec. 210 mandatory purchase require-
ment has become outdated.
Subtitle DRedundant Review of Certain Matters
Section 141 of the bill eliminates the redundant review of multiple agencies over
utility mergers. While I understand that there is significant opposition to this sec-
tion, I would recommend at a minimum establishing some reasonable time limit on
FERC merger review.
Placing a time limit on merger consideration would not in any way prejudice the
outcome of FERCs proceedings, but it would provide the markets with greater cer-
tainty in making judgments on transactions.
Title II: Transmission Operations
Section 201 embodies the FERC lite compromise bringing non-jurisdictional
utilities under limited FERC oversight. MidAmerican was one of the first investor-
owned utilities to endorse the compromise and supports this section.
FERC lite brings all owners of transmission facilities that are used in interstate
commerce under FERC jurisdiction for the purposes of establishing terms and condi-
tions of service. FERC would also be given the authority to ensure that rates
charged by currently non-jurisdictional utilities to users of their transmission sys-
tems are comparable to the rates those utilities charge themselves.
This is a major step forward in the creation of a seamless transmission grid while
recognizing the different financial structures of different transmission owners.
Many non-jurisdictional transmission owners have already moved to place their
assets in regional transmission organizations to ensure that their customers are not
isolated from regional electricity markets. TRANSLink, the independent trans-
mission company that MidAmerican has joined in the Upper Midwest, includes both
public power entities and a large regional rural cooperative.
Section 202 on regional transmission organizations, or RTOs, includes many
items that have been sought for years by advocates of a more transparent trans-
mission system: 1) a date certain for RTO participation 2) placing all uses of the
system under the same tariff and 3) independence requirements and minimum
standards for RTOs. The principle underlying the language is soundmandatory
participation with flexible implementation.
At the same time, I understand that this section has received some criticism that
it is too cumbersome and prescriptive. I suggest that work continue on this section
as the bill moves through the process in order to refine the sound concepts you have
laid out.
Title IIITransmission Reliability
Section 301 is a streamlined version of the reliability language that has been in-
cluded in earlier bills. This language has broad stakeholder support. MidAmerican
supports and prefers this approach, but could also accept the section on reliability
in the Daschle/Bingaman bill. The most important thing is to get a mandatory, en-
forceable reliability system in place.
In recent years, as markets have become more competitive and transmission ca-
pacity more constrained, pressures on the transmission network have multiplied.
133
We were fortunate that mild weather in much of the country last year prevented
any recurrences of the reliability problems we had seen in previous years, but vol-
untary compliance with reliability rules by organizations that do not have enforce-
ment authority is not a viable long-term system.
Title IVTransmission Infrastructure
Section 401 addresses two priority issues for improving the transmission infra-
structureencouraging FERC to develop incentive rates for investments in new in-
frastructure and requiring FERC to conduct a rulemaking on pricing to ensure ade-
quate capitalization of stand-alone transmission entities.
Transmission costs are pennies on the dollar of retail electricity rates, but the cost
of inadequate transmission capacity can be enormous. We need to get new trans-
mission built to improve reliability, security and market efficiency. Incentive rates
are one way to help get new transmission in the ground.
Congress also should direct FERC to review its transmission pricing policies to
ensure that these policies will support stand-alone transmission entities. Rates of
return must be adequate to attract capital to these new entities or else the system
will deteriorate. Legislation should not dictate what rate of return that FERC pro-
vides for transmission, but FERC needs to look at this issue as it moves forward
with RTOs.
These provisions are sound policy and should be non-controversial.
Some of the other policy directives toward FERC I would characterize as desir-
able, but not absolutely essential. Non-binding language may be appropriate.
Section 402 on transmission siting is very important. Reforming siting of inter-
state transmission lines is an issue that only Congress can address. Every electricity
consumer has a stake in fixing transmission bottlenecks. My first instincts are usu-
ally unfettered protection of property rights, but there must be some way to ensure
that vital transmission infrastructure gets built.
There are several problems here. When a proposed new transmission line or up-
grade crosses through a number of states, not every state will benefit equallysome
will not benefit at all. In other cases, because of complex transmission flows, a con-
straint in one state can only be addressed only by improving facilities in an entirely
different state. Finally, a number of states are constitutionally prohibited from
using their own eminent domain authorities for facilities that do not primarily ben-
efit the public in their own states.
The formula you have outlined would do the job. MidAmerican also has been in-
volved in talks with state regulators about an approach that would establish joint
federal-state boards under Section 209a of the FPA to address interstate trans-
mission issues such as new transmission line construction. If that approach would
resolve concerns expressed by others about this section, I would encourage the Com-
mittee to explore it.
Title VFederal Utilities
I understand that these three sections represent consensus approaches developed
by stakeholders in the affected regions. While I am not an expert on these issues,
I commend you and the representatives of these regions for your hard work and the
compromises you have developed.
Titles VI and VIIConsumer Protection and Related Matters
MidAmerican supports these sections. Consumer protection should be foremost in
the Committees mind as it moves forward with electricity modernization. Nothing
will turn consumers against the marketplace faster than abusive practices such as
slamming and cramming. H.R. 3406 includes provisions in these areas that are very
similar to those proposed by both the Clinton and Bush Administrations, as well as
the bill introduced last week by Senators Daschle and Bingaman.
The bills provisions clarify states authority to order retail electric competition
and the rights of consumers in open states to aggregate their purchases. The bill
protects state public purpose programs, increases criminal penalties for Federal
Power Act violations and expands FERC refund authority.
In addition to these provisions, regulatory transparency and access to books and
records provide the most important consumer protections. Under the PUHCA repeal
section of this bill, both FERC and state commissions have explicit statutory author-
ity to review the books and records of every utility holding company, not just the
limited number of companies currently covered under PUHCA.
Its probably not often that private sector witnesses come before this committee
and ask you to pass legislation increasing the ability of regulators to look at their
books. But regulatory transparency, protection against cross-subsidization and con-
sumer protection all make sense. Laws that arbitrarily keep investment and inves-
tors out of critical industries dont.
134
Mr. Chairman, theres one other topic Id like to address before I concludethe
problems at Enron. No one should make the Enron situation an energy issueit is
an issue of poor investments and the misuse of accounting. Energy markets are
functioning fine without Enron.
One of the untold stories of the Enron collapse is how little impact this has had
on the regulated entities that are the direct providers of most electricity and natural
gas to consumers. Most regulated entities took steps to limit their exposure to
Enron in the weeks leading up to the companys collapse. While lenders and traders
face liabilities as a result of their relationships with Enron, utilities managed their
potential exposure well.
I find it particularly ironic that some are trying to claim that the collapse of
Enron shows that we shouldnt repeal PUHCA. For years, Enron was one of the
most vocal opponents of PUHCA repeal, working to keep highly regulated, estab-
lished, asset-backed companies out of emerging energy markets.
Enron is not, and never had been, subject to PUHCA. And, for the most part, be-
cause of the nature of its business, it was not subject to many forms of state and
federal regulation to which public utilities would continue to be subject under this
bill.
State and federal regulators possess extensive authority over utility companies in
terms of the rates of return on investment that they allow. State regulators have
complete authority over what costs they will allow to be recovered in rates, and the
language of this bill clarifies that they have a federal right to review the books and
records of any utility under their jurisdiction.
This Committee has a great history on matters of oversight and investigations,
and I applaud Chairman Tauzin for announcing his intention to hold hearings on
this matter. I also believe Representative Markey has raised valid questions about
oversight of electricity trading markets that deserve the Committees attention.
I would recommend focusing on the following areas:
1) Did this situation involve abusive accounting practices?
2) Did outside auditors meet their professional obligations?
3) Were both the letter and intent of the law followed?
4) Is there adequate oversight of the trading side of the energy business and what
federal agency should have primary jurisdiction over these markets?
I believe the Committee should review these questions thoroughly and ensure that
measures to address any abuses are implemented properly. Given the scale of this
situation, I believe that if legislation is needed, there will be adequate incentive for
Congress to act. The Subcommittee should not, however, turn away from the task
of doing its part to aid the economic recovery by modernizing our electricity laws
and infrastructure because of problems at one company, no matter how high profile.
Thank you and Ill be happy to answer any questions you may have.
Mr. LARGENT [presiding]. Thank you, Mr. Sokol.
The Chair recognizes Mr. Richardson for his statement.
STATEMENT OF ALAN H. RICHARDSON

Mr. RICHARDSON. Thank you, Mr. Chairman. It is a pleasure to
be here today, and I appreciate the opportunity to testify. I am
Alan Richardson, President and CEO of the American Public Power
Association.
We have testified before this committee a number of times my-
self, and managers of individual public power systems. For the
most part, public power systems are net deficient in generation.
We are dependent upon an effectively competitive wholesale mar-
ket. Again for the most part, Public Power Systems are net defi-
cient in transmission. Most of us are transmission dependent utili-
ties.
Even those with significant transmission facilities of their own
are dependent upon others for additional transmission services. We
have a vested interest in making sure that the wholesale market
is really competitive, effectively competitive, and that it benefits
the interests of our utilities, the interests of our communities, and
135
the interests of our consumers, and in fact the interest of all elec-
tric consumers across the country.
We have been strong proponents of effective wholesale competi-
tion and proponents of Federal legislation throughout these long
debates over industry restriction that have proceeded for the past
5 years.
There have been a number of very significant events that have
occurred in the last couple of years, bookmarked by the bankruptcy
of PG&E at the beginning or the end of last year, and the bank-
ruptcy of Enron at the beginning of this year, or at the very end
of this year.
And then a series of events in between, including a change in
leadership and direction of the Federal Energy Regulatory Commis-
sion, and a real commitment by current Commissioners to try to
improve the situation in the wholesale power market.
They are taking a number of steps that we find very appropriate,
and there are things that we thought that the Commission should
have been doing in the past, and they are the kinds of things that
we have been encouraging Congress to address because of the re-
luctance of the Commission to act on their own behalf.
So in many cases we believe that a number of things that we
have been endorsing for Federal legislation are less necessary
today than they have been in the past, and we believe that the
Commission is on the right track and proceeding to put right
things in the wholesale power market arena.
And so for that reason, we would urge some caution in moving
forward in some of these areas. Let me address our primary con-
cerns with respect to this legislation, and focus on those rather
than all parts of the legislation, and then answer questions later
in this hearing.
We oppose the repeal of the FERC merger review authority in
this regard, and we support the position of the administration to
preserve this authority, and in fact we would like to see it ex-
panded to deal with the mergers of holding companies and to deal
with the consolidation and the acquisition of generation facilities.
And in fact as we have advocated for a considerable period of
time, we believe that the condition or the test that the Commission
should use is not one of whether mergers are consistent with the
public interest, but in fact whether mergers promote the public in-
terest and promote competition.
Every merger takes a competitor out of the marketplace, and it
can have significant adverse consequences for competition, and we
believe that this authority should remain in the hands of the Com-
mission.
We oppose the repeal of the Public Utility Holding Company Act,
and at the present time we believe that the Act has provided great
stability and financial structure to this industry.
In this period of turmoil, we believe that it would be inappro-
priate to repeal the act at this time. Further, we believe that it
would be inappropriate to repeal the Act until we are clear and
confident that we have created a market structure that can sustain
competition over time.
The Holding Company Act deals not only with structure, but
with protection of consumers from various abuses, and to the ex-
136
tent that those authorities are eliminated, additional authorities

should be given to the Federal Energy Regulatory Commission to
deal with problems of market power abuses in the new market-
place.
We oppose the provisions regarding the regional transmission or-
ganizations, and in this regard I believe we are consistent with the
views that have been expressed to this committee yesterday by
members of the Federal Energy Regulatory Commission.
This is a very prescriptive provision, and today more than ever
I believe the Commission needs the flexibility to deal with chang-
ing circumstances, and this provision in our view reduces that
flexibility and does not enhance it.
And for this reason, as well as for the fact that this provision
captures public power systems as a blanket requirement for partici-
pation in regional transmission organizations, we do not believe
that it is appropriate.
We believe that the Commission has adequate authority under
the present laws to deal with these issues. We oppose the new
standard on the stranded costs provision that would apply only to
newly created, publicly owned, electric utilities.
The States are fully capable of handling stranded cost provisions
when communities desire to establish their own electric utility sys-
tem, and in the event that they are not, there is a backstop with
the Federal Energy Regulatory Commission under Order 888.
We do not believe that an additional backstop created by this leg-
islation is necessary, and further the formula that is proposed in
here for stranded cost recovery is so onerous that it will make the
creation of new publicly owned utilities virtually uneconomic.
The bill requires FERC to consider incentive rates for new trans-
mission provisions, and new transmission facilities. We do not be-
lieve that this is necessary. We believe that the Commission has
the authority and the ability under the current standard of just
and reasonable rates, which is a zone, and not a single rate, to pro-
vide incentives that will attract capital.
We do not think that the problems in investing in transmission
have been due to a lack of capital, but they have been due to other
problems that go beyond that. Finally, the legislation subjects
wholesale power rates, and rates for transmission services provided
by publicly owned utilities to private power companies to after the
fact regulatory proceedings.
And while we support the FERC-lite provisions that were men-
tioned a minute ago about Mr. Sokol, this provision in the bill in
effect undoes that FERC like compromise. We do not think it is
necessary and we oppose that.
We believe that the Commission is moving in the right direction
in terms of rectifying many of the serious problems in the whole-
sale power market. It is pushing utilities toward RTO participa-
tion, but it is acting within its statutory limitations.
It is addressing the issue of when and under what circumstances
jurisdictional utilities may sell power at market-based rates. It is
establishing market monitoring and taking steps to ensure greater
transparency of information.
It is doing all of these things under the authority that it cur-
rently has, and we do not believe that the authority should be cir-
137
cumscribed, nor do we think that its flexibility to deal with these

issues should be limited.
Thank you for the opportunity to testify, Mr. Chairman, and it
is a pleasure, Mr. Largent, to appear before you, and perhaps my
final time before you. So, it is a pleasure to be here today.
[The prepared statement of Alan H. Richardson follows:]
PREPARED STATEMENT OF ALAN H. RICHARDSON, PRESIDENT AND CEO, AMERICAN
PUBLIC POWER ASSOCIATION
Mr. Chairman and members of the subcommittee, my name is Alan
Richardsonand I am the President and Chief Executive Officer of the American Pub-
lic Power Association (APPA). Thank you for the opportunity to appear before you
today to discuss APPAs views on H.R. 3406, the Electricity Supply and Trans-
mission Act. APPA represents the interests of more than 2000 publicly owned elec-
tric utility systems across the country, serving approximately 40 million citizens.
APPA member utilities include state public power agencies and municipal electric
utilities that serve some of the nations largest cities. However, the vast majority
of these publicly owned electric utilities serve small and medium-sized communities
in 49 states, all but Hawaii. In fact, 75 percent of our members are located in cities
with populations of 10,000 people or less. Further, most publicly owned utilities are
not generation self-sufficient but depend on wholesale power purchases to meet the
retail loads of the communities they serve. Competitive wholesale markets are in
our interest and we have a very long record in support of legislative and regulatory
initiatives that promote greater real competition in these markets. Finally, almost
without exception, publicly owned utilities depend on others for transmission. Fair
terms for transmission access at just, reasonable and non-discriminatory rates have
always been critically important for public power
Public power systems first and only purpose is to provide reliable, efficient service
to their local customers at the lowest possible cost. Publicly owned utilities also
have an obligation to serve the electricity needs of their customers and they have
maintained that obligation, even in states that have introduced retail competition.
And, because they are governed democratically through their state and local govern-
ment structures, public power systems operate in the sunshine, subject to open
meeting laws, public record laws and conflict of interest rules.
For decades, APPA has supported legislative efforts to make the wholesale electric
market more competitive. APPA was one of the major supporters of the trans-
mission access provisions of the Energy Policy Act of 1992. On numerous occasions
over the past few years, we have testified in support of the enactment of federal
legislation that promotes competition, increases reliability, expands the trans-
mission system, addresses market power in generation and transmission, and elimi-
nates tax-related impediments to competition for municipal utilities.
These past few years, and especially the past two years, have been a period of
rapid and dramatic change in our industry. This change has occurred in federal and
state policies on electricity competition and regulation; in the wholesale and retail
markets for electricity; and in the minds and attitudes of consumers. The lessons
learned from these experiences should serve to guide this subcommittee and other
policy makers on any additional changes to the industry that may be necessary.
The goal of Federal restructuring legislation should be to promote competition in
the wholesale electric market for the benefit of consumers. There are several funda-
mental elements necessary for real competition to exist and be sustained over time.
These include: ease of entry to and exit from the market; availability and trans-
parency of market data; a sufficient number of buyers and sellers; and effective con-
trols to prevent the abuse of market power where possible and remedy abuses when
discovered. 1H.R. 3406 is, presumably, a bill to benefit consumers and enhance the
Nations energy security by removing barriers to the development of competitive
markets for electric power . . . H.R. 3406 falls far short of these lofty goals because
it fails to encourage the creation of an environment that is consistent with the fun-
damental elements that are prerequisites for competition. Indeed, H.R. 3406 rep-
resents a significant step in the opposite direction. In its present form, this bill will
neither benefit consumers nor remove barriers to competition. It does just the oppo-
site.
Briefly stated, we oppose H.R. 3406 in its present form because:
1. It eliminates FERC merger review authority. This review is not redundant with
existing authority under the antitrust laws exercised by the Department of Jus-
tice and the Federal Trade Commission. Unrestrained and unexamined mergers
138
can clearly be a barrier to the development of competitive markets. Every merg-
er eliminates at least one competitor from the market and many mergers are
pursued precisely for this reason. FERCs authority to review proposed mergers
should be expanded to include mergers of holding companies, transfers of gen-
eration facilities, and consolidation of electric and natural gas companies. FERC
should also retain present authority to be used as necessary to promote com-
petition, including the authority to condition mergers and grant permission to
sell power at market based rates on membership in FERC approved regional
transmission organizations.
2. It repeals the Public Utility Holding Company Act, an important consumer pro-
tection statute, without enhancing FERCs authority to deal with market power
problems. All agree that PUHCA repeal will result in new mergers and further
consolidation within the electric utility industry. . . . Prescriptive that they se-
verely limit FERCs discretion with respect to such critical issues as appropriate
size, scope and function. Further, H.R. 3406 would prohibit FERC from condi-
tioning approval of such things as sales of power at market based rates on RTO
membership.
3. It imposes almost insurmountable financial obstacles on communities that want
to create their own locally owned and publicly controlled electric utility by dic-
tating the formula that must be used to calculate stranded costs incurred by
the incumbent utility. In calculating stranded costs, FERC must use as a bench-
mark factors that existed in 1996, factors that are not likely to bear any rela-
tionship to conditions that exist today or in the future, not the least of which
is the underlying historically installed generation capacity situation. The intent
of this section is clearto prevent the creation of new public power systems
whether or not they advance competition, or promote lower rates and better
service for Americas electric consumers.
4. It promotes incentive rates for transmission service that are unnecessary, incon-
sistent with the Commissions responsibilities to ensure only just and reason-
able rates for transmission, and will certainly lead to higher costs for con-
sumers.
5. It subjects wholesale power sales and rates charged for transmission access by
publicly owned utilities to private power companies to after-the-fact regulatory
proceedings by FERC for no legitimate public purpose.
Due to a number of recent developments, we recommend that the subcommittee
defer action on comprehensive restructuring legislation at this time. The number of
issues that now require congressional action has greatly decreased. This is due in
large part to the willingness of the current members of FERC to exercise authorities
already available to them under the Federal Power Act. We believe the current
members of FERC have a very clear vision as to what is necessary to promote real
competition and they recognize that competition is a means to promote the interests
of consumers and not an end in itself. FERC has set out, and begun to act on, an
impressive set of initiatives to establish effective wholesale competition. And while
public power systems have concerns about aspects of some of those initiatives, on
the whole, we applaud the FERC for taking action to deal with serious problems
in the wholesale markets.
Much of what APPA and others have advocated in federal legislation debates
prior to these actions by the FERC was mainly necessary in order to direct an un-
willing FERC to use its existing authority appropriately. APPA has consistently
supported pro-competitive legislative proposals that would both direct the Commis-
sion to act, and provide it with the political support to do so. Thus, in light of
FERCs new direction, it seems prudent to allow FERC to develop and implement
these stated initiatives without overly prescriptive statutory changes imposed by
Congress.
Any legislation that may ultimately be approved by Congress must first do no
harm to consumers and should, as mentioned above, build on the valuable lessons
learned in the recent past. For example, we learned from the Western electricity cri-
sis that premature decisions to allow market-based rates, based on outdated and in-
adequate analytical tools and faulty assumptions, will have significant negative con-
sequences for consumers. FERC is undertaking such a review at the present time.
An important tool at its disposal is to condition market based rate approval on par-
ticipation in an approved RTO. Provisions of H.R. 3406 would eliminate this author-
ity. If Congress is serious about promoting competition, it should applaud FERCs
recent initiatives, not advance proposals that undermine them. The collapse of
Enron teaches us that market transparency and full access to all books, records, and
other pertinent information by regulators is essential, although there may be many
other lessons yet to be learned as the Enron story unfolds.
139
We also learned that local control of public power systems continues to work ex-
tremely well. Publicly owned utilities in California and throughout the nation have
retained their obligation to serve all their customers and continue to meet that obli-
gation with quality, reliable service at cost-based rates. About the only thing Cali-
fornia did right was preserve local control of public power. Public power systems
have retained their generation assets and are actively planning and building to
bring additional resources on line, including significant investments in renewable
and distributed generation projects. Public power is also working to add additional
transmission capacity to the grid, particularly in key constrained areas. For exam-
ple, a public power entity, the Transmission Agency of Northern California, is a
major participant in the project to upgrade Californias infamous Path 15. Despite
these proven benefits of public power, and its role in promoting both infrastructure
development and greater competition, H.R. 3406 would create a nearly insurmount-
able financial barrier to the creation of new publicly owned electric utilities.
Following, then, are comments on certain specific provisions of H.R. 3406, based
on the foregoing discussion. As delineated below, APPA has significant concerns
about major elements of the bill and some additional concerns regarding several
other provisions. There are also several provisions in the bill that APPA supports
and those are discussed below as well. The positive provisions of the bill, however,
do not offset its significant negative impacts.
MAJOR CONCERNS
Section 141Repeal of certain provisions of the Federal Power Act regarding disposi-
tion of property, consolidation, and purchase of securities
This section repeals Section 203 of the Federal Power Act, thereby completely
eliminating FERCs authority to review, approve and condition utility mergers and
asset disposition. Accelerating consolidation in the electricity industry already
threatens competition and consumers interests. Not only does H.R. 3406 fail to in-
clude any provisions to address generation market power, as discussed below, but
inclusion of this provision actually makes it more likely that large generation com-
panies will get larger and be able to exercise market power. Thus, APPA strongly
opposes this section and urges its deletion.
Instead, APPA has consistently urged adoption of a higher standard that would
condition merger approval on an affirmative finding that the proposed merger will
promote the public interest, as opposed to the current standard that only requires
the merger to be consistent with the public interest. In addition, FERCs merger au-
thority needs to be clarified and expanded to cover mergers of utility holding compa-
nies as well as the disposition of generation assets by jurisdictional utilities and the
acquisition of natural gas companies. FERC lacks the clear authority to review the
former. While APPA believes FERC has the authority and responsibility to review
the latter, it has recently declined to do so. Removal of FERCs merger authority
will lead to an increasing amount of mergers resulting in greater consolidation of
market power that will ultimately undermine competition.
Title ISubtitle B Provisions Regarding PUHCA
APPA continues to oppose repeal of the Public Utility Holding Company Act
(PUHCA) unless FERC is provided clear authority and support to protect consumers
against the abuse of generation market power. PUHCA has been, and continues to
be, an important part of the structure of the electric utility industry by defining the
permissible structures of holding company formation and ensuring effective state
and federal regulation of these companies in order to protect consumers, investors
and the public interest. PUHCA is also the only federal statute that protects against
the abuse of cross-subsidization of affiliated ventures by regulated utility operations.
Cross-subsidization destroys true competition in unregulated markets and over-
charges ratepayers. The repeal of PUHCA should be considered with great caution.
Unfortunately, H. R. 3406 simply repeals PUHCA without any offsetting provi-
sions to protect consumers against generation market power or cross-subsidization
in company affiliate transactions. At a minimum, Section 113 should be amended
to allow federal and state regulators access to a broader range of pertinent informa-
tion, rather than the proposed limitation of records relating to costs. In addition,
APPA suggests that FERC, perhaps in consultation with the Federal Trade Com-
mission and the Department of Justice, should retain the authority to require the
restructuring of utility holding companies where its is demonstrated that the hold-
ing company operated in a manner inconsistent with the interests of electric con-
sumers.
Members of the subcommittee may have heard arguments from those in favor of
repealing PUHCA asserting that the Act has inhibited investment in new genera-
140
tion. PUHCA does not, in fact, inhibit investment in either generation or trans-
mission. Under 1992 amendments to PUHCA, investments in generation plants can
be made by any party in any location throughout the United States. In addition,
if regulation under PUHCA is such a detriment to the ability of a private company
to grow then why has the number of holding companies regulated by the Securities
and Exchange Commission (SEC) increased. In fact, in the past eight years both the
number of registered holding companies and the number of electric customers
served by registered holding company subsidiaries has more than doubled.
Title VIIInvestigation and Correction of Anti Competitive Conduct
APPA is also strongly opposed to this titles extension of FERC jurisdiction over
public power systems. This encroachment on local authority is neither prudent nor
warranted. Public power systems have been regulated differently under federal law
for more than 66 years. This is neither an accident nor an oversight, but rather good
public policy that recognizes that public power systems operate in the public inter-
est and are regulated at the local level. Local elected officials oversee public power
systems across the country to ensure consumers continue to receive low-cost, reli-
able electricity from their local providers.
Except for a few isolated examples, public power systems do not have surplus
electricity to sell. These systems do not represent a significant presence by sellers
in the wholesale markets, and public power is, and will continue to be, net pur-
chasers of electricity. The limited volume of surplus energy from public power sys-
tems precludes their ability to set a market-clearing pricepublic power systems
are price makers, not price takers. There is no policy justification for reversing dec-
ades of effective, local authority.
In addition, Section 702 undermines the compromise reached in portions of Sec-
tion 201, commonly referred to as FERC-lite, for regulation of public power trans-
mission facilities. Contrary to the intent of FERC-lite, Section 702 allows FERC to
retroactively set rates for transmission service.
Section 202Regional Transmission Organizations
APPA believes that Section 202 is unnecessary and in fact counter-productive. It
should be deleted from the bill. This section proposes modification of FERCs RTO
authority as set forth in Order 2000. It would require all transmission owners, in-
cluding public power systems, to form or participate in an RTO within 12 months,
and make certain other changes to characteristics of RTOs as set out in the Order.
APPA agrees that the single most important step that can be taken to achieve the
goal of a robust transmission system is the establishment of properly configured,
truly independent RTOs that have primary planning responsibility for the regional
grids under their control. APPA continues to support FERCs existing authority to
establish and require public utility participation in strong, truly independent RTOs
in order to facilitate the development of vigorously competitive retail markets.
FERC has maintained in Order 2000 and subsequent orders and proceedings, that
it has the authority to order RTO participation by jurisdictional utilities to remedy
undue discrimination or facilitate competition. Congress should do nothing to statu-
torily interfere with FERCs development of RTOs or attempt to prescribe specific
elements and deadlines.
Section 202 represents a significant and inappropriate contraction of FERCs ex-
isting authority and creates opportunities that will permit potential RTO partici-
pants to delay RTO formation (evidentiary hearings before FERC, FERC decisions
to be approved on appeal to the courts only if supported by a preponderance of the
evidence as opposed to the customary standard of substantial evidence). The sec-
tion fails to guarantee that RTOs created under this new authority will in fact pro-
mote effective competition, and because it is so prescriptive, it will virtually elimi-
nate the opportunity for FERC to make mid-course corrections as experience is
gained regarding the creation, operation and appropriate functions of RTOs. FERC
has substantial authority under the Federal Power Act to promote the creation of
RTOs and to determine the appropriate size, scope and functions to be performed,
including the authority to condition approval of proposed mergers or market based
rate sales on membership in a FERC-approved RTO. Section 202 expressly elimi-
nates this authority.
FERC must be allowed to proceed so that industry will have the stability that reg-
ulatory certainty in this area will provide and regulators will have the flexibility
they need to make adaptations as necessary. In addition, it is not necessary for Con-
gress to expand FERCs authority to order participation by public power systems,
public power will voluntarily join RTOs that are properly configured and provide
benefits for public power customers.
141
Section 401Sustainable Transmission Networks Rulemaking
Section 401 directs FERC to conduct a rulemaking on incentive and performance-
based transmission rates. APPA is strongly opposed to this section because it is un-
necessary and would lead to higher transmission rates. We therefore urge its dele-
tion. FERC, under the Federal Power Act and Order 888, already has sufficient au-
thority and flexibility to design transmission rates to promote economically efficient
transmission and generation of electricity. These rates remain subject to the just,
reasonable, and not unduly discriminatory or preferential standard that has been
the hallmark of FERC ratemaking authority for decades. (This standard was re-
cently affirmed by FERC in Order 2000 on RTOs). The language in this section
would have the effect of requiring FERC to undermine that standard.
Proponents of this language have asserted that incentive pricing is necessary in
order to raise the capital needed for investments in new transmission facilities.
They argue that incentives are justified because transmission investment is risky.
This is clearly not the case. Developing new transmission facilities is clearly a dif-
ficult task. There are substantial obstacles in the siting and permitting process.
Rights of way may be denied for parochial reasons with no consideration given to
broader public interest considerations. Current transmission owners may have in-
centives to delay grid expansion in order to protect sales of their own generation.
These are not problems that can be overcome simply by throwing money at them.
The fact is, transmission construction and operation is not inherently risky. Trans-
mission is the prototypical low risk, traditional, regulated utility investment that
has been very successful in attracting capital at reasonable, regulated rates of re-
turn. A good example of this is the recent Fitch Report on the new American Trans-
mission Company in Wisconsin, a transco that began operations on January 1, 2001.
As the report points out, over 95% of this transmission-only companys revenue re-
quirement is guaranteed by recovery from its firm, network customers regardless of
changes in load, weather, etc.
The obstacle to new transmission is, in fact, the lack of siting approvals, not the
lack of available capital. Thus, this provision will do nothing to cause the construc-
tion of additional transmission facilities or add capacity to existing lines. Moreover,
APPA believes that incentive rates will undoubtedly lead to increases in overall
transmission costs, which are decidedly not in the public interest.
OTHER CONCERNS WITH H.R. 3406
In addition to the major issues of concern identified above, APPA also has serious
concerns with several other provisions in the bill as discussed below.
Section 201(a)(3)Certain Wholesale Stranded Costs
This section would require FERC to impose wholesale stranded costs on cities and
towns that municipalize their electric service, using a prescribed formula. That for-
mula requires the calculation of wholesale stranded cost based on a reasonable ex-
pectation period that is based on the weighted average remaining useful life of gen-
eration assets owned or power purchased under contract by the public utility and
included in wholesale or retail rates in effect on July 9, 1996. The fact that these
generation assets may have been sold, or the contracts may have been modified in
the intervening years is irrelevant. Clearly, the only purpose of this language is to
render municipalization cost prohibitive and thus deny cities and towns across the
nation the fundamental right to determine whether they will offer electricity service
themselves, or franchise that service to a private company. This is the antithesis
of the choice and competition philosophy the U.S. Congress has espoused as jus-
tification for restructuring of the electric utility industry. Moreover, FERC currently
has the authority to fairly decide wholesale stranded cost disputes on a case-by-case
basis. Thus, this provision is unnecessary and APPA strongly urges that it be de-
leted.
Section 525Direct Service Industries
These provisions direct the Bonneville Power Administration (BPA) to negotiate
power sales contracts with all willing Northwest aluminum direct service industrial
customers beyond the term of the currently effective BPA power supply contracts.
This section would authorize the Department of Energy and not BPA to determine
what constitutes a reasonable level of federal firm power. The determination re-
garding reasonableness is to be based on an allocation of power that will enable
such customers to operate their facilities in the Pacific Northwest in an economic
manner for the long term. It would appear that the interests of a few aluminum
companies are to take precedence over all other consumers in the Pacific Northwest.
It is inappropriate for Congress to legislatively interfere with the renewal of these
contracts or to re-establish the situation where, due to wholesale price volatility,
142
these companies could, as they did in the recent past, make more money re-selling
their BPA power than by producing aluminum.
Section 532Wholesale Sales by Federal Power Marketing Administrations
This section states that all rates and charges for the sale of electric energy and
capacity by Power Marketing Administrations (PMAs) shall be the lowest possible
rates. Furthermore, the section asserts that charges to consumers will allow the re-
covery over a reasonable period of years, in accordance with sound business prin-
ciples, of all costs incurred by the United States for the production of electric energy
sold by a PMA, including repayment of the capital investment allocated to power
and costs assigned by the Acts of Congress to power for repayment.
Section 532 is unnecessary and should be deleted. Existing criteria in federal law,
going back to the Reclamation Project Act of 1939 and the Flood Control Act of
1944, for establishing PMA wholesale power rates is sufficient and appropriately
balances the requirements to recover federal investments and maintain low elec-
tricity rates.
Section 533Regulation of Federal Power Marketing Administration Transmission
Systems
APPA is opposed to this section which would subject PMA transmission rates to
full FERC jurisdiction, identical to that applied to public utilities. APPA believes
that the current system of regulating these rates, which recognizes the inherent dif-
ferences between investor-owned utilities and federal entities, is sufficient to recover
the federal governments costs and to protect consumers interests.
Section 534Accounting
Section 534 directs FERC to issue rules to ensure that PMAs utilize the same ac-
counting principles and requirements that are applicable to public utilities, proce-
dures for the filing of complaints with FERC to parties seeking to ensure compli-
ance, and procedures to ensure the power generating agencies and PMAs maintain
a consistent set of books and records for purpose of debt repayment.
This section is also unnecessary and should be deleted. Federal entities are dif-
ferent than public utilities in many ways, including their basic purposes and obli-
gations as prescribed in federal law. This section would set up conflicts between
those legally prescribed obligations that could increase electricity costs for con-
sumers while providing no long-term benefit to the federal government.
Section 102Federal Standards for State Net Metering Programs
These provisions require states, non-regulated electric utilities, and federal power
marketing agencies to implement net metering programs that meet minimum fed-
eral standardsfor renewable resources (up to 250 kilowatts). If a utility fails to
implement a program within one year, then FERC establishes a program that the
utility must implement. While there can be positive benefits to net metering, such
as its potential to increase the use of renewable resources and provide generation
alternatives, net metering is essentially a retail program and should be left to
states and localities. Approximately half of the states already have some type of net
metering program in the works. If net metering is to be included in a federal bill
it should, at the minimum, grandfather existing state programs.
Section 103Price-responsive Demand Programs
All utilities have demand reduction, load curtailment, and energy efficiency pro-
grams available now to their customers and public power systems in particular have
been very responsive to customers in this regard. APPA believes such programs are
best left to state and local entities, and this language is unnecessary. Moreover, this
provision raises a question about whether it is appropriate for the agency that regu-
lates wholesale power markets to be, in effect, a participant in those same markets.
PROVISIONS OF H.R. 3406 THAT APPA SUPPORTS
While APPA is opposed to the overall bill in its current form, there are several
sections of the bill where APPA either supports the language as introduced, or sup-
ports the concept embodied in the provision and would seek certain modifications.
These are discussed below:
Section 201(a)(2)Open Access Transmission (FERC-Lite)
While public power systems with transmission facilities are not anxious to be sub-
jected to FERC jurisdiction, the limited jurisdiction contained in this section of H.
R 3406, known as FERC-lite, is an acceptable compromise and is consistent with
APPA policy. In essence, FERC-lite would extend FERC jurisdiction to public, coop-
erative, and federal utilities with transmission facilities interconnected to the na-
143
tional grid. The FERC-lite language makes the important exception, however, that
FERC would not be given the authority to set transmission rates for these non-juris-
dictional transmitting utilities. Instead, FERC would determine whether the rates
they charge to others are comparable to those they charge themselves. If there were
discrepancies, FERC would remand the issue to the publicly owned utility. It is im-
portant to note that these provisions do not work unless accompanied by changes
in the federal tax code that resolve the barriers posed by the private use limitations
on tax-exempt bonds used to finance public power transmission facilities.
Title IIITransmission Reliability
APPA supports this title that represents one of the few matters relating to re-
structuring on which Congress could have the confidence to legislate. We appreciate
the inclusion in H. R. 3406 of additional language suggested by the North American
Electric Reliability Council and Chairman Bartons efforts towards creating a na-
tional electric reliability organization to set and enforce reliability standards, subject
to FERC oversight.
Section 402Transmission Siting
APPA also supports, in principle, the bills approach to federal siting authority as
outlined in section 402. APPA recognizes that backstop siting authority is a nec-
essary tool to facilitate the siting of new transmission lines that are stymied by the
current balkanized, state-by-state siting approval process. Transmission lines are
necessary to support interstate commerce, as well as security interests, and thus a
federal role in the siting of these lines is appropriate. APPA would strongly urge
that every reasonable effort be made first at the local and state levels to resolve
siting issues and that federal siting authority should only be used as a last resort.
Section 101Interconnection
APPA generally supports the provisions in the draft given the preservation of ap-
propriate local authority. We agree with calls for a more streamlined, uniform ap-
proach to distributed generation and the use of a standardized technical inter-
connection, but not at the expense of public health and safety, cost-shifting, and po-
tential reliability problems. This is one of a number of issues, however, where legis-
lation may not be necessary. FERC already has jurisdiction under Section 210 of
the Federal Power Act (FPA) to order interconnection to any transmission facility.
In addition, the IEEE may soon adopt an industry-wide interconnection standard
that adequately preserves local (distribution) control, and FERC may soon adopt
some standardized interconnection agreements that resolve most of the issues that
have concerned the generator manufacturers and owners. The successful conver-
gence of these events may obviate the need for Congress to act on this issue.
Title V, Subtitle ATennessee Valley Authority
This subtitle represents a previously developed consensus on the relevant issues
among the various stakeholders, including in particular TVAs municipal utility dis-
tributors, TVA, and the congressional delegation representing TVAs service terri-
tory. APPA supports the efforts of its members in this region to modify provisions
of existing law to promote overall goals of increased competition, better service and
lower rates for customers served by TVA.
Title VIConsumer Protections
Should restructuring legislation move forward, APPA supports the inclusion of the
provisions in this title to further protect consumers. However, other provisions pre-
viously addressed, including the elimination of FERC merger review, incentive pric-
ing for transmission, PUHCA repeal, and overly prescriptive provisions regarding
RTO formation create significant risks for consumers that are not offset or overcome
by these modest consumer protection provisions.
CONCLUSION
APPA opposes H. R. 3406 in its current form because so much of the bill is either
unnecessary or contrary to the interests of consumers and the promotion of effective
wholesale competition. Congress should either defer legislation and allow the FERC
to continue to implement its stated objectives, or address a much narrower range
of subjects necessary to fill in the gaps in federal oversight. In any event, it would
be wise to heed the lessons learned over the recent past and avoid overly prescrip-
tive changes in federal law.
Mr. LARGENT. Thank you, Mr. Richardson. Did you like the name
of the bill? I am just looking for one thing.
144
Mr. RICHARDSON. Well, the name is quite nice. I am not sure

that it lives up to its promise, sir.
Mr. LARGENT. Okay. Thank you, Mr. Richardson.
Mr. Johnston, we will let you collect yourself, and kind of come
back to you at the end. We appreciate you being here.
Mr. JOHNSTON. Thank you.
Mr. LARGENT. And now we will recognize Mr. English.
STATEMENT OF GLENN ENGLISH

Mr. ENGLISH. Thank you very much, Mr. Largent. Let me start
out by saying that I like the name of the bill. It is very nice, and
I appreciate that. The last time that I testified here with regard
to the draft legislation, I pointed out specific items that we had
concern over.
Today what I would like to address is not so much the trees as
much as the forest. I would like to step back and take a look at
this bill. The Rural Electric Cooperatives who I represent, some 35
million consumers across this country, consumer-owned and not for
profit organizations, have no issue with the objectives of this legis-
lation.
I think we are certainly in accord with what the stated objectives
of this legislation are. But sometimes things dont quite work the
way that we say we would like for them to work out.
A number of years ago the State legislators in California, when
they passed the restructuring bill, all thought that they were vot-
ing for cheaper power for their consumers.
They thought that this would be the results of the legislation
that was passed. Well, obviously things didnt quite work out that
way. The concerns that we have is that the stated objectives of this
legislation dont square with what the legislative language says
and what the legislation actually does.
I would suggest to you that instead of providing the Federal En-
ergy Regulatory Commission with more authority, it actually re-
stricts what the Federal Energy Regulatory Commission can do. It
takes away power from what State Regulators can do in order to
protect the public.
It makes it more difficult for the Federal Energy Regulatory
Commission to deal with disasters such as what we had in Cali-
fornia and less publicized disasters in Montana, and even in States
that have been heralded as great success stories like Pennsylvania.
I might point out to you that not a single rural electric consumer
in the State of Pennsylvania has had anyone who has offered them
any choice in any type of competition whatsoever.
That is not what was stated and not what was promised when
it took place. It certainly makes it much more difficult for the
States to deal with protecting consumers and the local communities
in those States over whom they have a responsibility and obligation
to take care of.
The limitation on the Federal Governments ability to protect
consumers and investors starts out with a repeal of the Public Util-
ity Holding Company Act. Certainly that restricts the ability to
deal with market power, and there is nothing in this legislation to
take the place of that in protecting the consumers of this country,
145
as was the objective of the Public Utility Holding Company Act or

is.
It repeals Section 203 of the Federal Power Act, taking away
FERCs authority to review mergers and transfers, and the facili-
ties again, and the ability to deal with a market power issue.
It includes four pages of detailed requirements for transmission
rates, and narrowing FERCs authority to reject transmission rates
that it believes are too high, and in fact requires the Federal En-
ergy Regulatory Commission to pass rates that they consider to be
unjust and unreasonable.
Nor does it take any of those excessive funds and require that
those funds be used to build new transmission, which is purport-
edly the stated objective of this particular provision.
It includes 12 pages of detailed requirements for RTOs, restrict-
ing FERCs authority to guide the formation of RTOs in the public
interest, and making it far more difficult for FERC to change
course in response to the changes in technology or wholesale power
markets.
It includes 21 pages of detailed requirements for interconnection
standards, preempting the ongoing rulemaking and restricts
FERCs ability to encourage new generation needed for a robust,
wholesale energy market.
With regard to the restrictions on the State, Mr. Chairman, it
Federalizes net metering, and preempting the net metering provi-
sions that have already taken place in 34 States, as well as the de-
liberate decisions by many of these States that net metering has
not been official to their communities.
It Federalizes the standards for interconnection for the distrib-
uted generation, preempting the interconnection provisions in sev-
eral States, and the ongoing rulemaking that is taking place in
many others.
It Federalizes the standards for retail rates for energy sold to
consumers with their own generators, and evading the absolute
core of State responsibilities. Now, this is not what I think the
common perception of the members of this committee, and perhaps
not even the authors of the legislation.
This is not what I think that they want. I think that we all want
the same thing, but I do say that we have to address the legislative
language to deal with this particular problem.
And even where it says that the authority is expanded, Mr.
Chairman, that in and of itself is restrictive. In a provision, for in-
stance, that requires the Federal Energy Regulatory Commission to
regulate the smallest of those within the electric utility industry,
that in itself limits the Federal Energy Regulatory Commission be-
cause it requires them to use very limited and scarce resources to
focus their attention on those who have the least impact, and those
where no complaint has been made, at the expense of focusing on
those who are the largest, and those where the abuses have taken
place, those where numerous complaints exist.
So I would simply suggest, Mr. Chairman, that we need to take
a hard look at this legislation in general, and look at it from a dis-
tance. Lets make sure that the legislation language does indeed
agree with what the promise is.
146
Lets make sure when the Members of this Congress vote for this
legislation that they do have the hope and be able to have the op-
portunity, and realize the reality that this legislation accomplishes
what it promises. Thank you very much, Mr. Chairman.
[The prepared statement of Glenn English follows:]
PREPARED STATEMENT OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL
RURAL ELECTRIC COOPERATIVE ASSOCIATION
INTRODUCTION
Chairman Barton and Members of the Subcommittee, I appreciate this oppor-

tunity to continue our dialogue on the restructuring of the electric utility industry.
For the record, I am Glenn English, CEO of the National Rural Electric Cooperative
Association, the Washington-based association of the nations nearly 1,000 con-
sumer-owned, not for profit electric cooperatives.
These cooperatives are locally governed by boards elected by their consumer own-
ers, are based in the communities they serve and provide electric service in 46
states. The 35 million consumers served by these community-based systems con-
tinue to have a strong interest in the Committees activities with regard to restruc-
turing of the industry.
Electric cooperatives comprise a unique component of the industry. Consumer-
owned, consumer-directed electric cooperatives provide their member-consumers the
opportunity to exercise control over their own energy destiny. As the electric utility
industry restructures, the electric cooperative will be an increasingly important op-
tion for consumers seeking to protect themselves from the uncertainties and risks
of the market. I would like to thank you, Mr. Chairman, and Members of the Com-
mittee for your receptiveness to the concerns and viewpoints of electric cooperatives.
DISTRIBUTION AND RETAIL ISSUES
Title I of H.R. 3406 would: (a) grant FERC the responsibility for establishing
standards for the interconnection of distributed generation to the distribution and
transmission systems; (b) mandate net metering for some consumer-owned genera-
tion; (c) establish principles for setting rates for retail energy service to consumers
with distributed generation; and (d) grant FERC new authority to regulate demand-
side management programs.
NRECA is pleased that the Chairman has narrowed the language on price-respon-
sive demand programs since the September draft. The statement that FERC pro-
grams shall not preempt or displace existing non-Federal price responsive demand
programs is critically important. Nevertheless, NRECA opposes the federalization
of these issues for several reasons.
First, electric cooperatives own 44% of the nations distribution system. Much of
these distribution systems are located in rural areas where the population density
is low, averaging less than 6 consumers per mile. As a result, the revenue generated
in these areas is extremely low, averaging approximately $7,000 per mile. Net me-
tering and distributed generation interconnection programs, for instance, if formu-
lated and implemented without a strong sensitivity and appreciation for local condi-
tions would lead to increased electricity costs for consumers in rural areas that
could least afford to pay them.
Second, electric cooperatives have obtained $36.4 billion in RUS financing. As a
result of this financing, RUS must approve the rates and practices of distribution
cooperatives and cooperatives that own generation and transmission. Negawatt and
net metering programs and distributed generation interconnection standards have
a direct impact on these rates and practices; however, they are being federalized
without any role for RUS. This will create significant problems for cooperatives, in-
cluding increased costs and the risk of conflicting regulatory obligations.
Third, these issues have traditionally been the responsibility of states and local
regulatory bodies for a very good reason: moving these issues to the federal level
makes it more difficult, or in some cases impossible, for states and local regulators
to protect the public interest. Policy decisions with respect to retail electric and dis-
tribution services can have a tremendous impact on local standards of living and
economies. It is important, therefore, for state and local regulators to be able care-
fully to balance local interests and to craft tightly focussed regulations of retail elec-
tric and distribution services that meet local needs. Moving responsibility over these
issues away from the local community to the federal level makes it less likely that
regulatory decisions will reflect local needs or protect local interests. Moving respon-
sibility over these issues away from the local community to the federal level also
147
makes it harder for utilities to provide reliable, universal electric service at a rea-
sonable cost.
Moreover, NRECA does not believe that FERC has the experience or the resources
to regulate effectively matters relating to retail electric or distribution services. Over
more than 65 years, FERC and its predecessor, the Federal Power Commission
(FPC), regulated wholesale sales and transmission service. FERC has never estab-
lished technical standards for the interconnection of generation at the transmission
levels, and it has never had any experience whatsoever regulating retail services or
distribution systems. FERC does not employ today a single distribution engineer.
Further, FERC is experiencing difficulty meeting its existing responsibilities today
with its limited resources. Multiplying FERCs responsibilities by giving it new ju-
risdiction over retail and distribution services would spread FERCs limited re-
sources even more thinly to the detriment of both wholesale and retail consumers.
NRECA was pleased to see in S. 1766, the Energy Policy Act of 2002, introduced
by Senators Daschle and Bingaman, that at least some of these issues were left to
the states. While S. 1766 expressed Congress interest in distributed generation and
similar retail policies, the bill left it to the states and local authorities under
PURPA Title I to decide whether and how best to address those policies in light of
local conditions and interests. NRECA believes that the PURPA Title I approach is
the best way for Congress to address all of the retail issues on which it feels the
need to speak.
If Congress insists on setting mandatory federal standards for distributed genera-
tion interconnection, net metering, and demand response programs, NRECA would
be happy to work with the Chairman to adjust and focus the language to better
serve consumer interests.
PUHCA, MARKET POWER, AND FERC MERGER REVIEW
NRECA believes that existing federal processes have been insufficient either to
prevent concentration of market power or to protect consumers and competitors
from the exercise of market power. Moreover, the proposal in Title I, Subtitle B, to
repeal PUHCA, and the proposals in Sections 141 and 142 to repeal FERCs merger
review authority and to eliminate NRC antitrust review would exacerbate existing
market power problems by accelerating the process of consolidation in the electric
industry and by making it more difficult for state and federal regulators effectively
to police market behavior.
NRECA believes that if PUHCA is repealed, it should be replaced with modern
legislation that takes a practical approach to controlling market power. Such legisla-
tion should provide regulators an array of tools that they can use to protect con-
sumers and enhance competition in electric markets. In particular, Congress should:
Impose on large electric utilities that seek to merge the burden of proof that their
merger is consistent with the antitrust laws if the Federal Trade Commission
(FTC) challenges the merger. The language would not change the burden of
proof in criminal cases.
Prohibit FERC from approving a merger involving a large electric utility if the
merger would lessen competition or tend to create or perpetuate market power.
Clarify, as does S. 1766, that FERC has jurisdiction to review mergers between
holding companies.
Clarify, as does S. 1766, that FERC has jurisdiction to review dispositions of gen-
erating facilities.
Authorize the FERC to take action to remedy existing market power, including
the authority to require a public utility with market power to divest generation
assets.
Require the FERC, the Department of Justice, and the FTC to conduct an inter-
agency study of market power in the electric industry.
Authorize the FERC to impose civil penalties on any public utility that exercises
market power in violation of the Federal Power Act.
Only by including such provisions in restructuring legislation that repeals
PUHCA can Congress protect markets and consumers from excessive consolidation
in the electric industry and the exercise of undue market power.
PURPA
NRECA supports the Chairmans proposal, in Title I, Subtitle C, to repeal the

mandatory purchase requirements in PURPA Section 210.
148
OPEN ACCESS AND FEDERAL JURISDICTION
NRECA opposes efforts to subject electric cooperatives to the jurisdiction of FERC.

That expansion of jurisdiction would unnecessarily impose heavy financial burdens
on electric cooperatives and their consumer-owners.
To put it in perspective, FERC should have a more significant role regulating
larger electric utilities such as Entergywhose subsidiaries own and operate more
than 14,000 miles of transmission line and sell more than 97,000,000 MWH to more
than 2,400,000 metered accountsthan it should have regulating Hickman-Fulton
Counties Rural Electric Cooperativewhich owns 1 mile of transmission line, and
sells less than 120,000 MWH per year to fewer than 4,000 member-owners.
NRECA, sincerely appreciated the Chairman Bartons efforts in the 106th Con-
gress to limit the expansion of FERC jurisdiction over electric cooperatives by apply-
ing the comparability standard over our transmission rate terms, and conditions,
thereby establishing FERC. While NRECA opposes the expansion of FERC juris-
diction, we remained neutral on H.R. 2944, the Electricity Competition and Reli-
ability Act, that incorporated the comparability standard.
NRECA is disappointed that H.R. 3406 does not reflect a similar understanding
of the cooperative difference. Section 702 emasculates FERC lite. While Section 201
creates the veneer of establishing the comparability standard as the basis for ex-
panding FERC jurisdiction over transmission-owning utilities, Section 702 evis-
cerates the comparability concept. Under this section, rather than review coopera-
tive transmission rates under a comparability standard, FERC would subject cooper-
ative transmission rates to a full review under the just and reasonable standard if
there were a complaint. Rather than remand rates to boards of directors elected by
cooperatives member-consumers, FERC would set the rates itself at whatever level
FERC considers appropriate.
In addition to emasculating FERC lite, Section 702 would also, for the first time,
subject cooperatives wholesale rates to FERC review and regulation. At a time
when Congress and FERC are seeking to move towards a competitive wholesale
market for electric energy, Section 702 would move in the opposite direction, in-
creasing the regulatory burden on electric cooperatives that seek to sell power in
the wholesale market. Yet, electric cooperatives have not been part of the problem.
Not-for-profit electric cooperatives have not gamed markets, they have not abused
consumers, and they have not exercised market power. It would be impossible for
them to have done so. Cooperatives do not own enough generation and are not large
enough players in electric markets to exercise market power. All together, electric
cooperatives generate only about 5% of the electric power in the country, which is
less than half of the power they need to serve their own consumers. All combined,
electric cooperatives sales to public utilities represent less than 1% of all sales in
the wholesale market.
Nevertheless, NRECA would like to work further with the Chairman and the
Committee to resolve any concerns they may have about FERCs role in a manner
that minimizes the adverse impacts on cooperatives and their consumer-owners. In
particular, NRECA would like to Committee to note that S. 1766 lacks any equiva-
lent to Section 702, and that S. 1766 includes a bright-line test exempting small
electric utilities from FERC-lite over transmission facilities without the need to
engage in expensive litigation.
REGIONAL TRANSMISSION ORGANIZATIONS
NRECA supports the formation of large, independent Regional Transmission Or-

ganizations or RTOs for all transmission owners.
RTOs, if fully independent and properly designed and operated, can substantially
mitigate the ability of transmission owners that also own generation to influence the
market for electric energy and to potentially discriminate against competitors. Be-
cause an effective RTO can operate the transmission system on a regional basis to
maximize efficiencies, it can also significantly improve reliability and reduce the po-
tential for power market instability that can lead to price spikes.
NRECA believes, however, that the RTO provisions in H.R. 3406 have two serious
shortcomings:
1. They fail to address certain issues that must be resolved before cooperatives can
participate fully in RTOs; and
2. They sharply restrict FERCs authority to shape RTOs in a way that strengthens
wholesale markets and protects consumers.
H.R. 3406 Must Enable Cooperatives to Join RTOs
NRECA has supported the formation of RTOs in a number of ways. NRECA sub-
mitted comments to the FERC in the rulemaking that resulted in Order No. 2000,
149
and, in fact, FERC adopted several of NRECAs recommendations. NRECA rep-
resentatives attended each of the Commissions five regional collaborative meetings
during 2000 and facilitated presentations made by individual cooperatives at those
meetings. NRECA also successfully facilitated voluntary RTO informational filings
by cooperatives even though the Commissions regulations did not require most co-
operatives to make such filings. Finally, NRECA and cooperatives in the south-
eastern United States have been very active in the ongoing FERC mediation that
is seeking to establish a single, large Southeast RTO.
For cooperatives to fully participate in RTOs as they clearly wish to do, and in
order for properly formed RTOs to develop, the following issues are of critical impor-
tance and must be addressed by H.R. 3406:
Full Recovery of Transmission Revenue Requirements. Transmission-owning co-
operatives must obtain full, immediate recovery of their revenue requirements from
an RTO if they agree to commit their facilities to the functional control of that RTO,
as contemplated by Order No. 2000.
Comparable Inclusion of Transmission Facilities. Some transmission-owning co-
operatives have had difficulty getting their transmission facilities accepted for oper-
ation/cost recovery by a future RTO on the same basis as investor-owned utilities
during the RTO formation process. Those IOUs opposing inclusion of cooperative
transmission facilities point to the radial, load serving nature of these facilities as
a reason for excluding them, overlooking the fact that they own comparable facilities
that are included in their FERC-regulated transmission revenue requirements. Co-
operatives therefore favor the use of a single, consistent standard to govern the
RTOs functional control of all transmission facilities, regardless of the owner.
Grandfathered Contracts. Many cooperatives have substantial contractual ar-
rangements with neighboring transmission providers. These contracts take many
forms: some are among joint transmission owners, others deal with provision of both
generation and transmission, and some are transmission-only agreements (both pre-
and post-Order No. 888). Whatever their content and form, these contracts are vital
to sustaining the cooperatives ability to provide on-going service to their own mem-
ber-owners. Transmission-owning cooperatives will not be able to join an RTO un-
less they have assurances that such contractual rights will not be severed without
their consent. Similarly, transmission-dependent cooperatives cannot lose access to
the transmission facilities needed to serve their member loads.
Regulation by the Rural Utilities Service. Many cooperatives have substantial
loans from, and, as a result, are substantially regulated by the Rural Utilities Serv-
ice (RUS) of the U.S. Department of Agriculture. The Commission must take RUS
regulation into account and coordinate with RUS to ensure that when cooperatives
seek to join RTOs, inconsistent, inefficient regulation of cooperatives by these two
federal agencies does not occur.
85-15 Revenue Test. Cooperatives lose their tax-exempt status when more than 15
percent of their revenue is received from nonmembers. The Internal Revenue Serv-
ice (IRS) has not clarified that, when a cooperative joins an RTO, the revenues re-
ceived by the cooperative from the RTO will not be deemed to be nonmember income
for purposes of the 85-15 revenue test. Congress must ensure that cooperatives can
join RTOs without unintentionally violating their current not-for-profit tax status.
NRECA appreciates the Chairmans effort to address the 85-15 issue in the Sep-
tember 21 discussion draft. That language, however, is inadequate to solve the prob-
lem and permit cooperatives to participate in RTOs. Since the September 21 discus-
sion draft addresses tax issues, it should incorporate the provisions in H.R. 1601.
Cost Shifting. RTO transmission rates and tariffs should (a) mitigate cost shifting
and take into account the specific needs and characteristics of each affected region,
including costs of operation, debt, and other expenses; (b) use the same effective re-
turn-on-investment to all participating transmission owners; and (c) recognize the
goal of establishing a single non-pancaked rate structure applicable to all customers.
RTO Market Power. As transmission service remains a monopoly, and as indi-
vidual RTOs assume control of larger transmission systems than individual trans-
mitting utility owners, RTOs will possess unprecedented market power. In this con-
text, a badly governed and operated RTO may be worse than no RTO at all. Thus,
the monopoly status of an independent RTO must be acknowledged at the outset,
and the RTOs transmission rate structure and associated cost-of-service should be
developed using traditional cost-of-service ratemaking principles. RTOs should not
be eligible for incentive ratemaking, performance-based ratemaking or light-
handed regulation that would have the effect of increasing rates to transmission
customers without concomitant benefits or reducing independent regulatory over-
sight of such an RTOs activities.
Collaborative Process. The Commission has sought to encourage RTO forming
public utilities to actively collaborate with cooperatives in order to accommodate
150
their needs as consumer-owned entities. Unfortunately, in numerous instances col-
laboration has been nothing more than a thinly disguised effort of saying, take it
or leave it. For cooperatives to effectively join RTOs, public utilities must be re-
quired to meaningfully collaborate with cooperatives beginning with the earliest
stages of RTO formation efforts. The Commission should not fail to act when in-
formed of RTO formation efforts that exclude cooperative participation.
NRECA would be happy to work with the Chairman and the Committee to draft
language that addresses these concerns.
H.R. 3406 Should Not Handcuff FERC
In a number of ongoing proceedings, FERC is now actively developing an RTO
policy intended to enhance wholesale electric markets and protect the public inter-
est. Congress should not interfere with that process with overly detailed and pre-
scriptive legislative language or by creating new procedural and substantive hurdles
for FERC to jump. Section 202 of H.R. 3406 suffers from both failings.
First, Section 202 reads far more like a regulation than a statute. It includes de-
tailed standards for RTOs that track many of the concepts included in FERCs
Order 2000. As a result, it sets in stone concepts that areand should bein a
state of flux. None of us yet knows what the wholesale markets will look like when
the transition to competitive markets is complete. We all continue to learn what ap-
proaches are most likely to support a robust wholesale market and what approaches
hinder the development of that market. Congress should not freeze the process of
experimentation now. Congress should not deprive FERC of the flexibility it needs
to respond to changing circumstances and new information. Otherwise Congress will
likely stunt the formation of wholesale markets and freeze in place inefficiencies
and inequities.
Moreover, while Section 202 includes many of the provisions of Order 2000, a
careful reading indicates that it is not a faithful recreation of the Order 2000 stand-
ards. Instead, it appears there are several strategic absences from the require-
ments of Order 2000. As a result, if FERC were required to approve any RTO that
met these incomplete standards, we could see many RTOs that are not independent,
that do not have adequate size or scope, that do not reflect the infrastructure needs
of the developing regional wholesale markets. Even if these holes in the statutory
standards were not intentional, they reflect the danger of being overly specific and
prescriptive in statutory language.
Finally, Section 202 imposes new procedural requirements on FERC and grants
parties before FERC new appeal remedies that they do not have in other contexts.
The combined effect of these new procedures and new remedies makes it far more
difficult for FERC to meet its statutory obligation to protect the public interest. Con-
gress should not interfere in this manner. FERCs existing procedures and appeal
processes are adequate in other contexts and should not be changed for the limited
benefit of transmission owners seeking to retail their market power after joining
RTOs.
ELECTRIC RELIABILITY
NRECA supports the reliability language 301 of H.R. 3406. That language would
require FERC to approve a new North American Electric Reliability Organization
that would have the power to ensure the reliable operation of the interstate bulk
transmission grid. NRECA believes that similar legislation needs to be enacted as
soon as possible.
NRECA opposes a competing proposal that would grant authority over reliability
directly to FERC. The Commission lacks the expertise or the resources to address
reliability on its own. There are questions whether it has been able to handle ade-
quately its existing mandate to regulate wholesale markets. Responsibility for the
reliability of the nations grid would strain its existing staff even further. On the
other hand, while stronger enforcement authority is needed, there is no question
that NERC has done an admirable job of setting reliability standards. Congress
should not reject an industry-based model that has worked extremely well for over
20 years.
TRANSMISSION INFRASTRUCTURE
North America needs the electric transmission equivalent of the interstate high-
way system. The current transmission system cannot reliably handle the dramatic
increase in transactions since the enactment of the 1992 Energy Policy Act. Trans-
mission deficiencies are contributing to wholesale and retail electric market failures
that are harming consumers.
151
For the following reasons, NRECA does not believe that these problems can be
solved by offering utilities high incentive transmission rates or other financial incen-
tives to build transmission.
FERCs Existing Authority. FERC already has the authority to establish incentive
transmission rates. FERC issued a policy statement in 1994 that would permit
more flexibility to utilities to file innovative pricing proposals . . . In Order
2000, FERC stated that it was critically important for RTOs [regional trans-
mission organizations] to develop ratemaking practices that . . . provide incen-
tives for transmission owning utilities to efficiently operate and invest in their
systems. 1 In testimony before the Energy and Air Quality Subcommittee on
September 20, 2001, Deputy Secretary of Energy Frank Blake stated that
FERC has great flexibility under current law to set transmission rates at a
level to attract investment. Since FERC has existing ratemaking authority to
approve incentive transmission rates, legislative language is unnecessary.
Higher Electricity Prices for Consumers. Currently, FERC has wide discretion in
determining whether a public utilitys transmission rate is reasonable. Legisla-
tive language requiring FERC to approve incentive transmission rates is de-
signed solely to handcuff FERC by curtailing its authority to reject unreason-
ably high transmission rates, resulting in higher electricity prices for con-
sumers. Also, by limiting FERCs ability to reject unreasonable rates, Congress
grants transmission owners the opportunity to gouge consumers with unreason-
ably high transmission rates.
The Investment Community Is Unconvinced. During the July 26 hearing before
the Energy and Air Quality Subcommittee, Thomas Lane, Managing Director in
Goldman Sachs Energy and Power Group, responded to Member questions and
stated that there is a role for transmission rates that include the more tradi-
tional return on investment of around 12%. Since Wall Street believes that in-
vestments will flow into the transmission sector based on the current rate struc-
ture, it is unnecessary to force FERC to rubber stamp unreasonable rates.
Lack of Newly Constructed Transmission. Legislative language forcing FERC to
approve incentive transmission rates will not automatically result in the con-
struction of new transmission for two reasons. First, the language fails to guar-
antee that transmission facilities will, in fact, be built in exchange for FERCs
approval of incentive rates. Second, the language would require FERC to ap-
prove incentive rates for the operation of existing transmission facilities. High
rates of return associated with existing transmission facilities will act as dis-
incentives to the construction of new transmission that is needed to support a
robust wholesale market.
Impediment to Generation Markets. The interstate transmission system should
exist to enhance the competitive generation market not to balkanize it further.
Any approach that allows individual companies with a financial interest in the
energy market to control transmission would have the unwelcome effect of
erecting tollgates on the interstate system, thereby narrowing generation mar-
kets and protecting the existing power of local generators.
NRECA is concerned that the incentive approach would raise the rates of return
and increase the costs for consumers, the intended beneficiaries of lower prices from
competition. Also, FERC not only has that authority under existing law, but also
has been encouraging utilities to propose innovative incentive-based rate designs for
years.2 In fact, FERC recently offered utilities a 300 basis-point increase in the rate
of return and a 7-year recovery period if they would build transmission in the West
by a stated deadline.
Given FERCs current efforts to encourage innovative rates, NRECA is concerned
that legislative language establishing only incentive rates may handcuff FERC, lim-
iting the agencys ratemaking discretion at a critical time in the development of a
competitive industry.
As an option to legislating higher rates of return, NRECA believes Congress
should lower the risk of building transmission. Congress should direct FERC to
allow any entity that builds a qualifying transmission project to recover its costs.
By reducing the risk, Congress could encourage institutional investors and others
1 FERC has also been encouraging the submission of incentive transmission rate proposals. Ac-
cording to FERC in Order 2000, we have approved five ISOs [independent system operators]
with innovative transmission pricing, but otherwise have received few innovative transmission
pricing proposals.
2 FERCs Pricing Policy for Transmission Services, 59 Fed. Reg. 55,031 (1994) (codified at 18
C.F.R. Part 2); Formation of Regional Transmission Organizations, 65 Fed. Reg. 810, 913 (2000)
(codified at 18 C.F.R. Part 35).
152
looking for low risk investments invest in improvements to the nations transmission
grid.
To qualify for assured cost recovery, NRECA believes that transmission projects
must:
be identified through a regional joint-planning process that coordinates and has
oversight for the reliable operation of the regional transmission system
be constructed according to best engineering practices
be operated by the relevant Regional Transmission Organization (RTO)
offer service pursuant to traditional cost-of-service principles, with the cost-of-
service analysis taking into account the low risk provided by FERCs obligation
to assure cost recovery.
By mitigating risk, spreading the cost of new facilities broadly, and enabling new
competitors to build transmission, NRECAs approach to new transmission helps to
ensure that the interstate highway system can be built at the lowest possible cost
to consumers.
Mr. LARGENT. Thank you, Mr. English.
Mr. Gent.
STATEMENT OF MICHEHL R. GENT

Mr. GENT. Thank you, Mr. Largent, and Chairman Barton, and
committee members. My name is Michehl Gent, and I am the
President and CEO of the North American Electric Reliability
Council, often referred to as NAERC.
I am going to restrict my comments to your Title III, which is
the provisions for reliability. We do support the reliability provi-
sions of this bill, and we strongly urge this subcommittee to move
and approve the language as soon as possible.
The electricity industry is changing in fundamental ways. These
changes are disrupting the mechanism that has ensured the reli-
ability of the North American electricity grid.
In order to prevent these changes from jeopardizing the reli-
ability, we must establish a system of mandatory enforceable reli-
ability rules. This bill does just that. As you know the industry is
in a great state of flux as regional transmission organizations are
forming and reforming, and vertically integrated companies are
separating their organizations into different business units.
It is more important than ever that an industry-led self-regu-
lating reliability organization be created to establish and enforce
reliability standards applicable to the entire North American grid.
The electric transmission grid is a single interconnective machine
that spans the United States and Canadian borders, and having re-
liability rules developed and enforced by a private organization, in
which varied interests from both countries participate, with over-
sight by the United States by the FERC, and similar review by reg-
ulators from Canada, is a practical and effective way to develop a
common set of rules needed for the international grid.
FERC plays a critical role in protecting the security, as well as
the reliability, of the North American grid, by marshaling the in-
dustrys best expertise as to the design and operation of electricity
transmission systems in North America.
And by serving as the point of contact for the various govern-
ment agencies that are interested in national security. Yet, their
continuing ability to serve in this function cannot be taken for
granted.
153
This legislation addresses this issue by authorizing FERC to cer-

tify a self-regulating electric reliability organization. This new elec-
tric reliability oversight system is needed now.
The continued reliability of North Americas high voltage elec-
tricity grid, and the security of its customers, whose electricity sup-
plies depend on that grid, is at stake.
An industry self-regulatory system is superior to a system of di-
rect government regulation for setting and enforcing compliance
with grid reliability rules.
The language of H.R. 3406, with the addition of a State regional
advisory body language, presents a sound approach for ensuring
the continued reliability of the Northern American electricity grid.
The reliability of North Americas interconnective transmission
grid need not be compromised by all these changes that are taking
place in our industry, provided that we have this legislation and
it is enacted now.
I would like to close by commending Chairman Barton for his
leadership on these very important electricity issues. Thank you.
[The prepared statement of Michehl R. Gent follows:]
PREPARED STATEMENT OF MICHEHL R. GENT, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL
Good morning, Mr. Chairman and members of the Subcommittee. My name is
Michehl Gent and I am President and Chief Executive Officer of the North Amer-
ican Electric Reliability Council (NERC).
NERC is a not-for-profit organization formed after the Northeast blackout in 1965
to promote the reliability of the bulk electric systems that serve North America. It
works with all segments of the electric industry as well as consumers and regulators
to keep the lights on by developing and encouraging compliance with rules for the
reliable operation of these systems. NERC comprises ten Regional Reliability Coun-
cils that account for virtually all the electricity supplied in the United States, Can-
ada, and a portion of Baja California Norte, Mexico.
Summary
NERC supports the reliability provisions (Title III) of H.R. 3406, and strongly
urges the Subcommittee to approve this legislation as soon as possible. With or
without Congressional guidance, the electricity industry is changing in fundamental
ways. These changes are disrupting the mechanisms that ensured the reliability of
the North American electricity grid. In order to prevent these changes from jeopard-
izing the reliability of our electric transmission system, we must adapt how we deal
with reliability of the bulk power system. NERC and a substantial majority of other
industry participants believe that the best way to do this is through an independent,
industry self-regulatory organization with FERC oversight, modeled after the securi-
ties industry, where the Securities and Exchange Commission has oversight of sev-
eral self-regulatory organizations (the stock exchanges and the National Association
of Securities Dealers).
Title III of H.R. 3406 embraces this concept, and preserves the key elements of
earlier versions of this legislation, such as H.R. 312, introduced earlier this year by
Mr. Wynn and co-sponsored by Mr. Shadegg, Ms. Eshoo and Mr. Ehrlich. Aside from
a few technical suggestions, the only suggestion for improving the reliability lan-
guage of H.R. 3406 that NERC would make is to add back the provisions addressing
the establishment of State regional advisory bodies and their role in advising reli-
ability entities and the Commission on reliability matters. This language can be
found in proposed new Federal Power Act section 215(n) of the Wynn Bill.
Just about two months ago, my colleague, David Cook, testified before the Sub-
committee on the subject of reliability legislation. I will not repeat his points, but
today will focus on two questions: (1) why is this legislation needed now; and (2)
how will Title III of H.R. 3406 meet this need.
Why Is This Legislation Needed Now?
NERC sets the standards by which the grid is operated from moment to moment,
as well as the standards for what needs to be taken into account when one plans,
designs, and constructs an integrated system that is capable of being operated se-
154
curely. The NERC standards do not specify how many generators or transmission
lines to build, or where to build them. They do indicate what tests the future system
must be able to meet to ensure that it is capable of secure operation. NERCs rules,
which are not enforceable, have generally been followed, but that is starting to
change. As economic and political pressures on electricity suppliers increase and as
the vertically integrated companies are being disaggregated, NERC is seeing an in-
crease in the number and severity of rules violations. Moreover, new issues are aris-
ing that demand an institution that can act fairly, but decisively, and in a timely
manner.
Let me give you an example. Traditionally, integrated utilities operated their gen-
erators to supply both the real (MW) and reactive (MVar) power necessary to
maintain secure operation of the transmission system, and charged for these serv-
ices as part of the regulated cost of service. (Its worth noting here that control of
flows on an electric system is not accomplished by valves and switches, as in gas
or telecommunications systems, but by controlling the outputs of generators.) These
services provided by generators included such things as spinning and non-spinning
reserves and system voltage support. Now with the generation function separated
from the transmission function in many cases, these services are no longer pro-
vided by a single, integrated entity, but must be arranged and paid for separately
through tariffs and contracts with generators. To assure that this is done, we need
enforceable standards that require transmission operators (including RTOs) to make
adequate provision in their tariffs and contracts for these essential reliability serv-
ices. How these arrangements are made can be the subject of filings with FERC or
other regulators, but they must be made. Absent such enforceable standards, the re-
liability of our interconnected grids will be at serious risk.
As a result of these changes in the industry, NERC is rewriting all of its reli-
ability standards according to a new functional reliability model that sets out
measurable and, under Mr. Bartons proposed legislation, enforceable requirements
for entities that are responsible for performing critical reliability functions. These
new standards will place uniform requirements on those that have the responsibility
for maintaining the minute-to-minute balance between load and generation, for see-
ing that power flows remain within the physical limits of the system, and that grid
voltages stay within tolerance.
Let me give you another, very different example of why this legislation is needed.
NERC plays a critical role in protecting the security, as well as the reliability, of
the North American grid. Since the early 1980s, NERC has been involved with the
electromagnetic pulse phenomenon, vulnerability of electric systems to state-spon-
sored, multi-site sabotage and terrorism, Year 2000 rollover impacts, and most re-
cently the threat of cyber terrorism. At the heart of NERCs efforts has been its abil-
ity to marshall the industrys best expertise as to the design and operation of elec-
tricity transmission systems in North America, and serve as the point of contact
with various federal government agencies including the National Security Council,
Department of Energy (DOE), the Nuclear Regulatory Commission (NRC), and the
Federal Bureau of Investigation (FBI), to reduce the vulnerability of interconnected
electric systems to such threats.
I know that this Subcommittee understands how vitally important this function
is. Yet NERCs continuing ability to serve this function cannot be taken for granted.
NERC traditionally has been funded by contributions from its Regional Councils.
New entrants and the pressure of competitive markets have made this funding
mechanism increasingly unsatisfactory. A new funding mechanism is needed that
properly and fairly supports NERCs activities, including its activities related to se-
curity. H.R. 3406 would address this issue by authorizing FERC to certify an elec-
tric reliability organization that, among other things, has established rules that al-
locate equitably dues, fees and other charges among end users. See proposed sec-
tion 215(c)(2)(B)(ii).
Title III of H.R. 3406 Would Provide for an Organization Capable of Protecting the
Reliability and the Security of the North American Electricity Grid
We need legislation to change from a system of voluntary transmission system re-
liability rules to one that has an industry-led organization promulgating and enforc-
ing mandatory rules, backed by FERC in the United States and by the appropriate
regulators in Canada and Mexico. Title III of H.R. 3406 would do this. Under these
provisions:
Reliability rules would be mandatory and enforceable.
Rules would apply to all operators and users of the bulk power system in North
America.
155
Rules would be fairly developed and fairly applied by an independent, industry
self-regulatory organization drawing on the technical expertise of industry
stakeholders.
FERC would oversee that process within the United States.
This approach would respect the international character of the interconnected
North American electric transmission system.
Regional entities would have a significant role in implementing and enforcing
compliance with these reliability standards, with delegated authority to develop
appropriate regional reliability standards.
On this latter point, H.R. 3406 authorizes the electric reliability organization ap-
proved by FERC to enter into agreements to delegate authority to a regional entity
to enforce reliability standards. H.R. 3406, however, omits provisions in previous re-
liability legislation, such as H.R. 312, that direct the Commission to establish a re-
gional advisory body of State representatives to provide advice to the Commission
and the national reliability organization. See proposed new section 215(n) of the
Federal Power Act in H.R. 312. NERC would suggest that the State regional advi-
sory body language be added to H.R. 3406.
Having an industry self-regulatory organization develop and enforce reliability
rules under government oversight as H.R. 3406 would do, takes advantage of the
huge pool of technical expertise that the industry has been able to bring to bear on
this subject over the last 30 plus years. Having FERC itself set the reliability stand-
ards through its rulemaking proceedings, even if based on advice from outside orga-
nizations, would require FERC to develop or acquire technical expertise that it does
not now have, and would dramatically expand FERCs workload at perhaps the
worst possible time. In addition, reliability rules and market standards need to be
worked out together, using a fair and open process, in a collaborative fashion by all
segments of the industry. FERCs adjudicative processes are ill-equipped for this.
The electric industry is in a great state of flux, as regional transmission organiza-
tions are forming and reforming, and vertically integrated companies are separating
and selling off various portions of their business. With all the uncertainty as to who
will ultimately operate and plan the interconnected transmission system, it is more
important than ever that an industry-led self-regulatory organization be created to
establish and enforce reliability standards applicable to the entire North American
grid, regardless of who owns or manages it. The self-regulatory reliability organiza-
tion authorized in H.R. 3406 can help assure that grid reliability is maintained,
even while new market structures and new RTOs are being formed. Because FERC
will provide oversight of the electric reliability organization in the U.S., FERC can
ensure that the organizations actions and FERCs evolving market policies are
closely coordinated.
The industry self-regulatory organization authorized in H.R. 3406 also addresses
the international character of the interconnected grid. There is strong Canadian
participation within NERC now. Having reliability rules developed and enforced by
a private organization in which varied interests from both countries participate,
with oversight in the United States by FERC and with equivalent activity by pro-
vincial regulators in Canada, is a practical and effective way to develop the common
set of rules needed for the international grid. Otherwise, U.S. regulators would be
dictating the rules that Canadian interests must followa prospect that would be
unacceptable to Canadian industry and government alike. Or, regulators on either
side of the border might decide to set their own rules, which would be a recipe for
chaos. There are also efforts under way to interconnect more fully the electric sys-
tems in Mexico with those in the United States, primarily to expand electricity
trade between the two countries. With that increased trade, the international nature
of the North American electricity market will take on even more importance, further
underscoring the necessity of having an industry self-regulatory organization, rather
than FERC itself, set and enforce compliance with grid reliability standards.
Conclusion
NERC commends the drafters of H.R. 3406 for attending to the critical issue of
ensuring the reliability of the interconnected bulk power system as the electric in-
dustry undergoes restructuring. A new electric reliability oversight system is needed
now. The continued reliability of North Americas high-voltage electricity grid, and
the security of the consumers whose electricity supplies depend on that grid, is at
stake. An industry self-regulatory system is superior to a system of direct govern-
ment regulation for setting and enforcing compliance with grid reliability rules. The
language of H.R. 3406, with the addition of State regional advisory body language,
presents a sound approach for ensuring the continued reliability of the North Amer-
ican electricity grid. It is also an approach that has widespread support among in-
dustry, state, and consumer interests. The reliability of North Americas inter-
156
connected transmission grid need not be compromised by changes taking place in
the industry, provided reliability legislation is enacted now.
Mr. LARGENT. Thank you, Mr. Gent.
Ms. Church.
STATEMENT OF LYNNE H. CHURCH

Ms. CHURCH. Thank you, Mr. Largent, and Chairman Barton,
and other members of the committee. I am Lynne Church, Presi-
dent of the Electric Power Supply Association, which is the trade
association representing competitive power suppliers.
This includes independent power producers, marketers, and mer-
chant generators. The industry today comprises over 33 percent of
the Nations installed capacity. The draft bill generally endorses a
competitive wholesale market, which of course we want, and we
deeply appreciate the leadership that Chairman Barton and others
on this committee have shown on the issue of electric restructuring.
We support the spirit of this bill, like Chairman Barton abso-
lutely believes in a competitive, reliable, and efficient wholesale
market. And many of the provisions of this bill further this goal by
providing either needed legislative authority, or affirmation and en-
dorsement of authority that FERC already is implementing.
An example of this provisions include the requirement that all
transmitting utilities join regional transmission organizations with-
in 12 months; assurance that currently non-FERC jurisdictional
utilities provide open access to their grid; the adoption of predict-
able, non-discriminatory interconnection standards, which are crit-
ical for the investment in construction of new generation; and rec-
ognition that there must be authority to enforce reliability stand-
ards.
While there is much in the bill to applaud, key provisions in this
legislation could hinder the ongoing evolutionary process, and ham-
per the development of a truly competitive wholesale market.
The new RTO procedures in Section 202 of the bill would slow
or even stop the ongoing progress of RTO development, and invite
additional litigation and foot dragging. It does this through the re-
quirements for multiple evidentiary hearings, new cost benefit as-
sessments, and court appeals under standards of judicial review
that are not currently applicable to the Federal Power Act.
Most critically it provides for a stay of FERC action while these
appeals are being heard. These new requirements will provide
ample opportunity for obstruction of RTO development by those op-
posed to truly open access grid.
A second example is the prescriptive approach taken that will
prevent progress in fine-tuning the existing ISOs and RTOs that
have been approved. It will remove much of the flexibility that
FERC and the stakeholders have to adjust and reform these mar-
ket organizations as the wholesale power market inevitably
changes and matures.
A third example is that the definition of market participant is too
limited and does not recognize that transmitting organizations
compete with generators in alleviating congestion, and that default
providers to have generating assets that compete also with com-
petitive assets.
157
A fourth example is that the reliability provisions do not reflect

recent industry developments, and would hinder coordination of re-
liability standards and market practices.
EPSA endorses the need for mandatory reliability standards that
are broadly applicable for the entire industry.
However, this bill does not reflect that FERC must be the ulti-
mate authority to endorse reliability standards, and that RTOs
have an important role in enforcing reliability. In addition, the in-
dustry has begun a DOE sponsored collaborative standards cross-
setting process that would integrate reliability in market practices.
Ideally, this process will produce a new legislative proposal that
can be considered by the full committee next spring or next year
when it takes up this bill. If I may, I would like to discuss the
Enron situation, which has been the underlying current of this
whole discussion, and what it does and what it does not mean.
Opponents of the competition have seized upon the occasion of
the companys fall to proclaim that electric restructuring should be
halted or even reserved. In fact, however, the most persuasive proof
of the success of competitive markets was seen in what happened
in the markets after the bankruptcy occurred.
As the FERC Commissioner stated yesterday, trading went on
without a wrinkle. Competitors immediately stepped into the void
and kept prices and supplies on an even kneel. Other trading plat-
forms saw a significant increase in their volume and several new
trading platforms are even in the works as we speak.
And most importantly the lights stayed on. While still young, the
competitive energy markets have matured to the point where they
can withstand the departure of a once-dominant player.
And finally, members of this subcommittee, and to others in-
volved in this debate, a word of caution. Some thought leaders, in-
cluding financial analysts and commentators, have been making al-
legations that other competitive suppliers may be quick to follow
Enron.
We have already heard some discussion of the Cal-Pine situation
that was triggered by some quotes in the New York Times this past
weekend. Their stock dropped precipitously, although it is fortu-
nately coming back.
Such irresponsible statements made with no real evidence and a
lack of understanding of Cal-Pines and other suppliers business
models have the potential to repeat the Enron tragedy for other
employees and stockholders unjustifiably.
The factor that ultimately brought Enron down was a lack of
confidence in their financial strength by investors and customers.
I urge caution in debating these issues to avoid casting doubt on
other companies financial strength without knowing the facts.
In closing, thank you for allowing me to testify for the industry
today. We look forward to continuing to work with the sub-
committee to advance development of a robust competitive market.
[The prepared statement of Lynne H. Church follows:]
PREPARED STATEMENT OF LYNNE H. CHURCH, PRESIDENT, ELECTRIC POWER SUPPLY
ASSOCIATION
Chairman Barton, Representative Boucher and members of the Committee, I am
Lynne H. Church, President of the Electric Power Supply Association (EPSA) and
am here today representing EPSAs member companies. EPSA is the national trade
158
association representing competitive power suppliers, including independent power
producers, merchant generators and power marketers. These suppliers, which ac-
count for more than a third of the nations installed generating capacity, provide re-
liable and competitively priced electricity from environmentally responsible facilities
serving global power markets. EPSA seeks to bring the benefits of competition to
all power customers. On behalf of the competitive power industry, I thank you for
this opportunity to comment on H.R. 3406, the Electric Supply and Transmission
Act.
THE RATIONALE PERSISTS FOR FEDERAL LEGISLATION
We deeply appreciate the leadership that Chairman Barton and others here today
have shown on the issue of electricity restructuring and the time and energy this
subcommittee has devoted to this topic. We support the spirit of this billlike
Chairman Barton, EPSA believes in a competitive, reliable, efficient, environ-
mentally-friendly wholesale electricity market. Many provisions in this bill further
this goal. For example, there is the requirement that all transmitting utilities join
regional transmission organizations (RTOs). In addition, the bill will ensure that
currently non-FERC-jurisdictional utilities provide open access to the interstate
transmission grid.
We particularly endorse the adoption of predictable, non-discriminatory inter-
connection standards, because we cannot overemphasize how important these rules
are for investment and construction of new generation. We have been heavily in-
volved in the regulatory process underway at FERC to resolve these issues. Your
bill could give additional impetus to this effort and shortcircuit dilatory litigation.
While there is much in your bill to applaud, key provisions in this legislation
could hinder the evolutionary process that started with Energy Policy Act of 1992,
and hamper the development of a truly competitive wholesale market. These include
language in the sections on RTOs and reliability, which I will discuss in turn.
RTO LANGUAGE WOULD SLOW PROGRESS OF RTO DEVELOPMENT
Although the bill text requires full participation by owners of the interstate trans-
mission grid in RTOs, the provisions in Section 202 of this legislation would stop
or dramatically slow progress that is now being made towards RTO development
and invite additional litigation and foot-dragging. The provision is prescriptive and
includes requirements for multiple evidentiary hearings, a new cost-benefit assess-
ment, court appeals under standards of judicial review not normally applicable to
Federal Power Act cases, andmost criticallya stay on FERC action while these
appeals are being heard. This new process would radically change the calculations
that companies now make when they consider how and whether to take part in the
development of an RTO.
The RTO process now underway at FERC is difficult and painful for most partici-
pants. But there is no substitute for a deliberative process that allows for the steady
evolution of market institutions and needs. We believe that the prescriptive ap-
proach laid out in the bill will stop the progress being made towards RTO develop-
ment while participants take their cases to court. It will also remove much of the
flexibility that the FERC has to adjust or reform these market organizations as the
wholesale power market inevitably changes in size and scope.
We all agree that RTOs must be independent of any class of market participants
in order to be an effective, non-discriminatory manager of the interstate grid. How-
ever, the definition of market participant in this bill specifically excludes both trans-
mission owners that do not buy or sell power and entities that own generation but
only provide default service. Transmission development clearly affects the market
value of generation and default providers have assets that influence regional whole-
sale prices. The blanket exclusion as it appears in the bill cannot be justified.
Lastly, the language in Title IV, Sec. 216 (a) 6 says that incentive rates should
be used to promote the voluntary participation in and formation of RTOs. While
EPSA does not, in general, object to the use of incentive rates, this particular lan-
guage should be removed. The language runs contrary to the idea that RTO partici-
pation must be mandatory, and conflicts with the RTO section of the legislation.
RELIABILITY PROVISIONS DO NOT REFLECT RECENT INDUSTRY DEVELOPMENTS
With respect to the bills provisions related to grid reliability, EPSA endorses the
need for mandatory reliability standards that are broadly applicable to the whole-
sale power industry. However, the language in this bill could limit the industrys
ability to address the challenges of the ongoing development and restructuring of
the wholesale transmission system essential for reliable, efficient and well-func-
tioning markets. As currently drafted, the bill shifts significant aspects of standards
159
development and enforcement away from FERC to a new electric reliability organi-
zation. The text also does little to reflect the role that will need to be played by
RTOs in future market management.
Given FERCs substantial responsibility to ensure the reliable and efficient oper-
ation of the transmission grid and the imperative to develop effective RTOs, this
makes little sense. However, developed energy standards will have an inevitable im-
pact on bulk power transmission systems and market operation essential for reli-
ability. Accordingly, the standard setting process outlined in the bill raises serious
concerns that failing to centralize this activity with FERC could lead to confusion
and conflicts among multiple entities.
Further, the bill fails to account for recent industry efforts to rethink the nature,
scope and organizational structure for a new standards setting process that recog-
nizes the need to integrate reliability and market practices. On December 7th, over
125 representatives from all areas of the industry met at a DOE-sponsored con-
ference co-facilitated by EPSA, EEI, ELCON and NEM. The forum provided an op-
portunity for all interested parties to begin a broader collaborative effort to consider
whether and how to combine NERCs reform proposals with the new North Amer-
ican Energy Standards Board (NAESB) that the Gas Industry Standards Board
(GISB) approved on December 5th. As currently written, Chairman Bartons legisla-
tion could preempt this important process.
Many participants in the DOE conference acknowledged the potential benefits of
merging NERC into NAESB. In a reprisal of the leadership role she assumed as
FERC Chair, Betsy Moler challenged all the parties to work on a compromise model
for a new standard setting organization. The implications of these developments are
clear: legislation should not deny FERC or industry stakeholders the opportunity to
develop new approaches to energy standards development. The DOE intends to host
another conference on January 28th to discuss the progress on resolving these
issues. Ideally, this process will produce a new legislative proposal that can be in-
corporated in this legislation when it is considered by the full Energy and Com-
merce Committee next spring.
PURPA OWNERSHIP RESTRICTIONS ARE OUT-OF-DATE
Permit me to make one last point on the legislation: the bill addresses PURPA
without repealing the current PURPA ownership restrictions. These restrictions
were initially included to encourage non-utility ownership of new power facilities
and are now out-of-date. These restrictions are not applicable to other competitive
generation, such as exempt wholesale generators, and add unnecessary complexity
and inefficiency to the generation industry. While this reform has not yet been in-
cluded in the Subcommittee bill, this proposal was included in the Senate Demo-
cratic energy proposal unveiled recently and in Administration position papers. We
urge you to adopt this proposal.
A COMMENT ON THE ENRON BANKRUPTCY
While my testimony today is focused on legislation, it is reasonable to expect the

members of the Subcommittee are likely to raise questions related to the recent
tragic bankruptcy of an EPSA member company, Enron. Let me make a few com-
ments on the matter.
In the days since the company sought protection under bankruptcy laws, there
have probably been hundreds of Enron obituaries published in news and trade pa-
pers. Some have been straightforward and thought-provoking examinations of how
a company could move so quickly from being an industry innovator to insolvency.
Others raised complex and appropriate questions about the diligence of investment
analysts or the role of public accounting firms.
However, some of these post-mortem pieces have illuminated little more than the
well-established fact that, like every entity that forges a new path to overwhelming
success, Enron made some enemies along the way. While its true and ironic that
the competitive markets Enron helped to foster ultimately sealed its fate, they also
worked as intended to help shield energy customers from any catastrophic con-
sequences.
Opponents of the competition that Enron helped bring to the nations energy mar-
kets have seized upon the occasion of the companys fall to proclaim that electricity
restructuring should be halted or even reversed. In fact, however, the last few
months have demonstrated exactly the opposite.
Perhaps the most persuasive proof of competitions power was seen in what hap-
pened in energy markets immediately following the largest bankruptcy filing in U.S.
historypractically nothing. Theres no talk of a bailout, either at the state or fed-
160
eral level. Trading went on with the many strong competitors who immediately
stepped into the void and kept prices and supplies on an even keel.
Although the move toward open markets is still young, competitive energy mar-
kets already have matured to the point where they can withstand the departure of
a once-dominant player.
Many have used Enrons collapse to predict an end to competitive wholesale power
markets. Missing from this chorus of doomsayers, however, are those who watch en-
ergy markets most closely. On Wall Street and at the Federal Energy Regulatory
Commission, experts understand that Enrons decline, rather than a caution against
competitive markets, actually highlights the need to hasten their arrival throughout
the nation. These observers remain committed to opening energy markets because
they have seen the power of competition put downward pressure on prices, open new
reservoirs of supply and encourage efficiency and technology advances at every turn.
In closing, thank you for allowing me to testify here today. We look forward to
continuing to work with you to advance the development of a robust, competitive
electricity market.
Mr. LARGENT. Thank you, Ms. Church.
Mr. Rouse.
STATEMENT OF JAMES B. ROUSE
Mr. ROUSE. Chairman Barton, Congressman Largent, and mem-
bers of the subcommittee, I am James Rouse from Praxair, Inc., an
industrial gases company in Danbury, Connecticut. I am here as
Chairman of and represent the Electricity Consumers Resource
Council, or ELCON, the national trade association of large indus-
trial customers.
ELCON recognizes a functioning and competitive wholesale mar-
ket is necessary to support retail competition, which is slowly being
implemented in States throughout the Nation. We continue to be-
lieve that retail competition can benefit all consumers if markets
are truly open and consumers are free to choose among suppliers
who are actually competing.
Unfortunately, too many States, California being prime among
them, purport to establish free and open retail markets, but in re-
ality they simply have created the appearance of competition, while
operating in more or less the traditional regulatory mode.
The legislation before us today, H.R. 3406, addresses wholesale
markets. On behalf of ELCON and its member companies, I com-
pliment Chairman Barton for introducing the bill.
However, while I believe that the legislation represents progress,
it has certain shortcomings that would deny wholesale electricity
markets from realizing their full competitive potential. Let me take
some examples.
The link issue of regional transmission organizations, trans-
mission citing, and the repeal of PUHCA, all of which affect market
power. Customer choice in retail access are wonderful goals, but
they are worthless if the transmission system does not allow for
the free and non-discriminatory movement of electricity from sell-
ers to buyers.
Thats why RTOs are important. FERCs actions to date recog-
nize that the scope and configuration of RTOs are essential to their
operation. RTOs must be large enough to mitigate market power.
The governance must be truly independent, and not subject to
undue influence from vested interests. As I have explained at
greater length in my written material, I believe that the language
in H.R. 3406 is harmful in that it constrains FERCs ability to ob-
jectively analyze a regional market, and ensure that each proposed
161
regional transmission organization will in fact facilitate the most

effective movement of power.
It would encourage smallerthe bill wouldsmaller rather than
larger RTOs, and that is not conducive, in my opinion, to increased
competition. Similarly the language in H.R. 3406 could restrict
FERC as it continues in its efforts to provide guidance on market
design and operation.
This is an issue of vital interest to large industrial users. FERC,
under the able chairmanship of Pat Wood, needs the opportunity
to be flexible and creative. H.R. 3406 would constrain and inhibit
FERC in its current market design docket.
Turning to incentive rates, which Section 401. Let me reiterate
what others have said. ELCON has previously stated before this
committee that there is no demonstrated reasonother than per-
haps greed of monopoly transmission owners
to provide incentive rate making for construction of new trans-
mission.
This subcommittee in an earlier proceeding heard from somebody
from Goldman Sachs, I believe, an analyst who said that invest-
ment in transmission is low risk and that traditional rates of re-
turn are sufficient to induce investment.
The recently released winter assessment by the North American
Electrical Liability Council stated that transmission capacity for
this coming winter is adequate. If FERC believes that incentive
rates are necessary, which is a decision that can and should be
made on a case-by-case basis, they have sufficient authority under
the present law.
But I have seen no study or documentation to support this far
reaching proposal to implement across the board incentives. Such
a provision will produce higher electricity prices for all consumers
as previous witnesses have stated, and it may not relieve the trans-
mission congestion where it is truly needed.
ELCON members believe that legislation should address de-
mand-side issues, as well as supply site issues. We view the inclu-
sion of a price responsive demand program in Section 103 as gen-
erally positive.
But we question the need to set an arbitrary 5 percent target,
which we fear would create yet another Federal program rather
than developing a robust customer remote response or CRR mar-
ket.
There is no magic or correct number for customer load response.
Individual consumers should be able to compare the value of con-
tinuing to consume electricity to manufacture their products, with
a value being paid to reduce the consumption of electricity.
We hope that this section will not result in a traditional De-
mand-Side Management, responses which have historically re-
sulted only in added costs for consumers, with relatively little re-
duction in overall demand and virtually no reduction in the system
peaks, which is really the most critical area.
We believe that consumers, large and small, if given sufficient in-
formation, and appropriate market based incentives, will adjust
their electricity consumption accordingly.
No target or any other artificial threshold is necessary or desir-
able. A final note on reliability. ELCON has worked on this issue
162
for nearly 5 years. We at ELCON have a simple objective; one orga-

nization charged with setting standards for both reliability and
commercial practices, and retail and wholesale standards, which
we believe those two cannot be separated.
That organization should be overseen by the FERC, and the or-
ganizations standard setting practices should be truly fair, open,
balanced, and inclusive. The new language proposed in H.R. 3406
may be too prescriptive to achieve that goal.
In conclusion, Mr. Chairman, may I compliment you and your
staff for a valuable document. I appreciate the time that you and
your staff have spent with industrial users, and in particular,
ELCON.
And although we do not believe that this bill in its present form
contains all the answers, it does offer a sound structure from which
to proceed when the subcommittee begins mark-up.
As always, Mr. Chairman, we thank you for your continuing in-
terest in making electricity markets more competitive.
[The prepared statement of James B. Rouse follows:]
PREPARED STATEMENT OF JAMES ROUSE, CHAIRMAN THE ELECTRICITY CONSUMERS
RESOURCE COUNCIL
Mr. Chairman, members of the Subcommittee, I am James Rouse from Praxair,
Inc., an industrial gases company headquartered in Danbury, Connecticut. I am
Chairman of, and today represent, the Electricity Consumers Resource Council, or
ELCON, the national association of large industrial users of electricity. ELCON
members represent nearly every segment of the manufacturing community and have
operations in every state.
ELCON was established in 1976, and ELCON member companies pride them-
selves on being among the original proponents of open and competitive retail and
wholesale electricity markets. We compete in open markets to sell our products.
Since we purchase nearly every other raw material or component needed to manu-
facture our products in competitive markets. Why shouldnt we be able to purchase
electricity in competitive markets as well?
We recognize that a functioning and competitive wholesale market is necessary
to support retail competition which is slowly being implemented in states through-
out the Nation. We continue to believe that retail competition can benefit all con-
sumers if markets are truly open and consumers are free to choose among suppliers
who are actually competing. Unfortunately too many states (California being prime
among them) purport to establish free and open retail markets but in reality have
simply created the appearance of competition, while operating in the traditional reg-
ulatory mode.
The legislation before us today, HR 3406, addresses wholesale markets. On behalf
of ELCON and its member companies, I compliment Chairman Barton for intro-
ducing this bill. While I believe that the legislation represents progress, it has cer-
tain shortcomings that would deny wholesale electricity markets from realizing their
full competitive potential.
Take, for example, the linked issues of regional transmission organizations
(RTOs), transmission siting, and the repeal of the Public Utility Holding Company
Act (PUHCA), all of which affect market power. Customer choice and retail access
are wonderful goals, but they are worthless if the transmission system (which will
remain monopolistic for many years) does not allow for the free and non-discrimina-
tory movement of electricity from seller to buyer. Given that owners of monopoly
transmission facilities will still possess and exercise market powerthat is monop-
oly powerI cannot emphasize too strongly that some regulation is needed to en-
sure that the owners of transmission systems do not use their government-granted
monopoly power to the detriment of real competition and consumers.
That is why RTOs are so important. FERCs actions to date recognize that the
scope and configuration of RTOs are essential to their operation. RTOs must be
large enough to mitigate market power. Their governance must be truly inde-
pendent and not subject to undue influence from vested interests. I believe that the
language in HR 3406 is harmful in that it constrains FERCs ability to objectively
analyze a regional market and ensure that each proposed regional transmission or-
163
ganization will, in fact, facilitate the most efficient movement of power and increase
competition in wholesale markets.
The two tests proposed in this bill as a means of demonstrating adequate scope
and configuration of an RTO are both flawed. Asking an RTO to conduct a cost-ben-
efit study is an invitation to litigationlitigation that will be based only on duel-
ingand probably inconclusivecost-benefit analyses. This will not resolve the
issue quickly, nor will it necessarily resolve the issue properly. The generation suf-
ficiency test is based on a faulty premise; it would encourage smaller rather than
larger RTOs and, furthermore, it is simply not workable for several reasons. Suffi-
cient generation within an RTO is an irrelevant factor. In an optimally constructed
wholesale market, we would have large seamless RTOs where power can flow not
only within but between RTOs so that the most efficiently produced electricity can
reach the greatest number of consumers. A generation sufficiency test invites mo-
nopoly transmission owners to exclude from an RTO new, more efficient generation
facilities once the generation sufficiency test is met. It also fails to consider both
load increases and generation changes that could transform generation sufficiency
to generation insufficiency. I could go on, but we see no reason to hamstring or oth-
erwise restrict FERC as it looks at proposed RTOs under the guidelines it promul-
gated in Order 2000.
Similarly, the language in HR 3406 could restrict FERC as it continues its efforts
to provide guidance on market design and operation. This is an issue of vital inter-
est to large industrial users. In fact, six ELCON members, including my own com-
pany, recently submitted affidavits to FERC as part of an ELCON filing in FERCs
docket on market design, pointing out that the model now utilized by the PJM-ISO,
while favorable in many ways, should not necessarily be used as the sole template
for best practices throughout the Northeast and the Nation. At a minimum, the
existing flaws in PJM should be fixed before its platform is extended to the entire
Northeast region. FERC, under the able Chairmanship of Pat Wood, needs the op-
portunity to be flexible and creative. HR 3406 would constrain and inhibit FERC
in its current market design docket.
Turning to incentive rates (Section 401), let me reiterate what ELCON has pre-
viously stated before this Subcommittee. There is no demonstrated reasonother
than the greed of monopoly transmission ownersto provide incentive rate-making
for the construction of new transmission. The Subcommittee, in an earlier pro-
ceeding, heard from a Goldman Sachs analyst that investment in transmission is
low risk and that traditional rates of return are sufficient. The recently released
Winter Assessment by the North American Electric Reliability Council (NERC) stat-
ed that transmission capacity for this coming winter is adequate. There may be spe-
cific areas where new transmission is necessary to alleviate congestion. Path 15 is
an obvious example. But simply giving the monopoly transmission owners a higher
return on transmission will not motivate them enough to relieve congestion that is
now protecting their high-cost generation. If FERC believes incentive rates are nec-
essarya decision that can and should be made on a case-by-case basisthey have
sufficient authority under present law. But I have seen no study or documentation
to support this far-reaching proposal to implement across-the-board incentives.
Such a provision will produce higher electricity prices for all consumers and may
not relieve transmission congestion where it is truly needed.
Rather than simply requiring incentive rates, first remove governmental impedi-
ments. One way to remove impediments is to offer a federal right of eminent domain
for the siting of transmission lines. There is no reason that the siting of new trans-
mission lines should be treated differently from the siting of new natural gas pipe-
lines. The language in HR 3406, by a providing federal backstop, is a good, though
incomplete, first step.
Turning to PUHCA repeal, this statute is the only federal consumer protection
statute for electricity consumers. No bona fide consumer group supports the repeal
of PUHCA without adequate replacement provisions. We believe that there should
be clear authority vested in the FERC to prohibit any potential anti-competitive
practices involving regulated utilities and unregulated affiliates. Rules are needed
to address the operational unbundling of generation, transmission, system control,
marketing and local distribution functions. State and Federal regulators must have
complete access to all books and records of all regulated entities and entities owned
or controlled by regulated entities. In addition, PUHCA repeal should not be effec-
tive until states have retail access or until competition on a nation-wide basis is oth-
erwise achieved. ELCON and ELCON members find the language in HR 3406 lack-
ing in this regard.
ELCON witnesses and others have long defended before this Subcommittee the
Public Utility Regulatory Policies Act (PURPA), including the need for back-up
power in non-competitive states (which we are pleased is included in this bill. I will
164
make the casevery brieflyfrom a slightly different perspective. Utilities claim
PURPA has resulted in higher rates for consumers. By definition, this cannot hap-
pen as long as PURPA is implemented correctly. In fact industrial users value
PURPA as having brought competition to the electricity marketplace. Any higher
prices, if there were any, were the result of state-approved actions and of poor deci-
sion-making by utilities. To repeat a point ELCON witnesses have made previously:
PURPA did not create above market contracts for utilities. In fact utilities have
more above-market contracts with other utilities than they do with PURPA quali-
fying facilities. It is worth noting that only utilities, not consumers, are seeking the
repeal of PURPAs purchase and sale provisions.
ELCON members believe that legislation should address demand side issues as
well as supply side issues. We view the inclusion of a Price-Responsive Demand
Program in Section 103 as generally positive. But we question the need to set a
5 percent target, which we fear would create yet another federal program rather
than developing a robust customer load response (CLR) market. There is no magic
or correct number for CLR. Individual consumers should be able to compare the
value of continuing to consume electricity to manufacture their products with the
value of being paid to reduce their consumption of electricity. We hope that this Sec-
tion will not result in traditional Demand Side Management responses, which have
historically resulted only in added costs for consumers and relatively little reduction
in overall demand and virtually no reduction in system peaks. We believe that con-
sumerslarge and smallif given sufficient information and appropriate market-
based incentives will adjust their electricity consumption accordingly. No target or
any other artificial threshold is necessary or desirable.
A final note on reliability. For nearly five years ELCON has worked with NERC
to craft language creating a new reliability organization that recognizes both
changes in the transmission system and changes in the electricity stakeholder com-
munity. We lately have worked with the Gas Industry Standards Board (soon to be
renamed the North American Energy Standards Board) as they too attempt to pro-
vide structure and guidance to our interstate electricity grid. We at ELCON have
a simple objective: one organization charged with setting standards for both reli-
ability and commercial practices and retail and wholesale standards (because we be-
lieve that they cannot be separated). That organization should be overseen by
FERC. The organizations standard-setting practices should be truly fair, open, bal-
anced and inclusive. The new language proposed in HR 3406 may be too prescriptive
to achieve that goal.
In conclusion, Mr. Chairman may I compliment you and your staff for a valuable
document. I appreciate the time that you and your staff have spent with industrial
users. Although we do not believe that this bill, in its present form, contains all of
the answers, it offers a sound structure from which to proceed when the Sub-
committee begins markup. May I observe that the State of Texas has conferred on
our Nation its President, the chairman of the FERC, and the chairman of this Sub-
committee. Seldom is a single state the source of such potential for the improvement
of our countrys electricity market. And, as always, Mr. Chairman, we thank you
for your continuing interest in making electricity markets more competitive.
Mr. LARGENT. Thank you, Mr. Rouse.
Mr. Acquard.
STATEMENT OF CHARLES ACQUARD

Mr. ACQUARD. Thank you, Mr. Chairman and members of the
subcommittee. I am Charlie Acquard, Executive Director of the Na-
tional Association of State Utility Consumer Advocates. I am here
today testifying on behalf of Consumers for Fair Competition.
Our ad hoc coalition believes that Congress and the Federal En-
ergy Regulatory Commission must take clear and significant steps
to promote the market structure needed to foster and sustain effec-
tive competition in wholesale electric markets, and its associated
consumer benefits.
The events of the past year in California highlight the imperfec-
tions in the market, and the consumer consequences of failing to
promote effective competition. CFC is pleased that the FERC has
begun to take the steps to address these problems.
165
Any electricity legislation approved by Congress should affirm

and strengthen the general direction taken by FERC. Anything else
will undermine the creation of effectively competitive wholesale
markets and harm the interests of consumers.
Regrettably, H.R. 3406 fails to do this. Rather, it retreats from
current law and reasons for policy initiatives, and actually reduces
consumer protections. Specifically, CFC believes that the following
changes to this proposal are necessary to promote effective whole-
sale competition.
First, H.R. 3406 will repeal the Public Utility Holding Company
Act. We continue to oppose PUHCA repeal unless a company by
provisions that satisfy the underlying purpose of the Act; consumer
protection, mitigation and market power; prevention of abusive af-
filiate transactions; and effective regulatory oversight.
H.R. 3406 does not include these basic consumer protections.
Therefore, CFC urges the subcommittee to permit PUHCA repeal
only if other changes outlined below are simultaneously adopted, or
other steps are taken to ensure competitive wholesale markets and
non-abusive utility affiliate transactions.
Second, CFC again urges the subcommittee to strengthen the
utility merger review and FERCs merger review authority. We
believe mergers should be approved only if they promote the public
interest, resulting in discernible consumer and competitive bene-
fits.
Rather than ensure effective scrutiny of all proposed utility
mergers, H.R. 3406 retreats from current law. Therefore, CFC
urges the subcommittee to delete Sections 141 and 142 of H.R.
3406, and instead amend Section 203 of the Federal Power Act to,
one, require utility mergers to promote the public interest to be ap-
proved.
And, two, ensure that FERC has clear authority to review merg-
ers between holding companies, convergence mergers between gas
and electric utilities, and generation only asset sales.
Third, the CFC commends you, Mr. Chairman, for addressing the
thorny issue of RTO formation and attempting to forge a com-
promise. However, we do not believe that the language contained
in H.R. 3406 will permit the grid management needed to support
effective wholesale competition.
Therefore, CFC urges this subcommittee to replace Section 202
with language affirming the authority of the Commission to pro-
mote RTOs and produce clear and discernible consumer benefits.
Fourth, we continue to strongly oppose mandated incentive or
performance based rates for transmission as contained in Section
401. The Federal Power Act currently provides sufficient latitude
for adopting of incentive and performance based transmission
rates, provided that such rates be statutory and mandated, and a
just and reasonable determination.
Section 401 would effectively redefine the just and reasonable
standard and require incentive rates for transmission service. We
similarly would oppose then the inclusion of negotiated rates that
would violate the tenants of the Federal Power Act.
Therefore, CFC urges the deletion of Section 401. Fifth, CFC sup-
ports the increase in criminal and civil penalties for Federal Power
Act violations that is contained in H.R. 3406.
166
However, this action does not provide the guidance and tools
needed to establish competitive markets, oversight of those mar-
kets, and remedies for market flaws, manipulation, and abuse.
CFC cannot support electricity legislation that fails to include ef-
fective market power provisions. CFC urges the subcommittee to
include provisions to, one, require the establishment of clear rules
defining the conditions necessary for competitive markets and mar-
ket-based rate authority.
Two, establish information disclosure requirements and a market
monitoring responsibility. Three, direct FERC to take any action
necessary to penalize violations of market rules, correct market
flaws, and imperfections, and remedy and mitigate market manipu-
lations and market power abuses.
And, four, remove the time restrictions on rate refunds contained
in existing law. Finally, any treatment of market power must also
address the potential for abuse in the area of affiliate transactions.
Such abuses bring with them intended harm to rate payers and
competition alike.
Neither FERC nor the individual State Commissions currently
possess the jurisdiction authority to oversee the relationship be-
tween utilities and their affiliates that engage in unregulated,
multi-State, non-poor, business operations.
With proper oversight these affiliate transactions can lead to un-
fair competition, and higher rates from captive customers. There-
fore, CFC urges inclusion of effective mechanisms to prevent abuse
of any competitive affiliate transactions.
We propose extending Federal Trade Commission Authority and
unfair competition, and trade practices, in the energy services mar-
ket. In conclusion, competitive wholesale electric markets can
produce consumer benefits.
However, those benefits will not materialize or be consistently
available if the market is not structured to ensure its competitive
functioning. FERC has taken steps since the extension of Chair-
man Wood to take the necessary steps.
However, the direction of the Commission can radically shift
through changed membership, judicial challenge, and political pres-
sure. We believe that the market and consumers will benefit from
statutory support for the general policy direction of the current
Commission, providing clear statutory guidelines and tools con-
sistent with the policies outlined in our testimony, will foster a ro-
bust and competitive market, and provide certainly to market par-
ticipants, avoid unnecessary delay, and ensure that consumers ben-
efit.
Thank you, Mr. Chairman, for this opportunity, and I would be
happy to answer any questions that the subcommittee might have.
[The prepared statement of Charles Acquard follows:]
PREPARED STATEMENT OF CHARLIE ACQUARD ON BEHALF OF CONSUMERS FOR FAIR
COMPETITION
Mr. Chairman, members of the Subcommittee, I am Charlie Acquard, Executive
Director of the National Association of State Utility Consumer Advocates. I am testi-
fying today on behalf of the Consumers for Fair Competition (CFC), an ad hoc coali-
tion of consumer-owned utilities, small and large electric consumer representatives,
small business interests, and others. While the interests of these organizations are
diverse, we are unified in the belief that Congress and the Federal Energy Regu-
latory Commission (FERC) must take clear and significant steps to promote the
167
market structure needed to foster and sustain effective competition in wholesale
electric markets, and its associated consumer benefits.
The events of the past year in California highlight the imperfections in the mar-
ket and the consumer consequences of failing to promote effective competition. CFC
is pleased that the Federal Energy Regulatory Commission (FERC) has begun to
take steps to address these problems, including actions to advance RTOs, refine the
screen for market-based rates and lay out conditions for approval of performance-
based transmission rates. Any electricity legislation approved by Congress should
affirm and strengthen the general direction taken on these issues by FERC. Any-
thing else will undermine the creation of effectively competitive wholesale markets
and harm the interests of consumers.
Specifically, CFCs urges the subcommittee to include the following provisions in
electricity legislation:
The development and application of effective market rules, oversight and enforce-
ment for wholesale electric markets that parallels those that exist for the secu-
rities industry;
A stronger standard for approval of proposed utility mergersand application of
that standard to all mergers, combinations and asset sales;
Formation of large, independent regional transmission organizations that possess
strong maintenance, planning and expansion responsibility;
Limitations on utility diversification and inter-affiliate transactions to protect con-
sumers, promote fair competition, and prevent complicated transactions that
pose risks to investors; and
Provides necessary consumer protections as part of any PUHCA repeal effort.
Regrettably, as outlined below, H.R. 3406 fails to advance these necessary poli-
cies, retreats from current law and recent FERC policy initiatives, and reduces con-
sumer protections. CFC offers you the following detailed comments and looks for-
ward to working with the subcommittee in making those changes necessary to en-
sure effective wholesale competition.
PUHCA Repeal
Title ISubtitle B of H.R. 3406 would repeal the Public Utility Holding Company
Act of 1935 (PUHCA). As CFC has previously testified before this subcommittee, we
oppose PUHCA repeal unless accompanied by provisions that satisfy the underlying
purposes of the Actconsumer protection, mitigation of market power, prevention
of abusive affiliate transactions and effective regulatory oversight. H.R. 3406 does
not include these basic consumer protections.
CFC urges the Subcommittee to permit PUHCA repeal only if the other changes
outlined below are simultaneously adopted, or other steps are taken to ensure com-
petitive wholesale markets and non-abusive utility affiliate transactions.
Merger Review
As detailed in prior testimony, CFC urges the Subcommittee to strengthen utility
merger review and close gaps in FERCs merger review authority. We believe merg-
ers should be approved only if they promote the public interestresulting in
discernable consumer and competitive benefits. The rapid rate of industry consolida-
tion threatens to reduce competition, frustrate market entry and create new oppor-
tunities for market power abuse by far-flung economic empires. In addition, CFC
agrees with FERC Chairman Pat Wood and the Administration that FERC merger
review should extend to holding company mergers and generation-only asset sales.
We also believe that the proposed Dynegy acquisition of Enron underscores the need
for FERC review of convergence mergers between electric and gas utilities.
Rather than ensure effective scrutiny of all proposed utility mergers, H.R. 3406
retreats from current law. Title ISubtitle D would eliminate important merger re-
view and conditioning authority by the FERC and Nuclear Regulatory Commission
(NRC). Repealing Section 203 of the Federal Power Actcombined with repeal of
the Security and Exchange Commissions merger review under PUHCAdrastically
reduces effective merger review and eliminates the ability of FERC to condition pro-
posed mergers on those actions necessary to protect the public interest and facilitate
effective competition. The Justice Department and Federal Trade Commission lack
the resources and expertise to effectively review proposed mergers and the on-going
regulatory responsibility to enforce merger conditions.
CFC also opposes Section 142 that would eliminate prospective NRC anti-trust re-
view and allow for the waiver of existing anti-trust license conditions. Contrary to
the sections title, this review is not duplicative, since it is not performed by any
other anti-trust agency at the time of license issuance or renewal. NRC anti-trust
review has been an effective tool in securing transmission access over the years
and the transmission agreements resulting from these reviews form much of the
168
basis for the competition that exists in the wholesale electric market today. Rather
than upholding these existing transmission rights, Sec. 142 of H.R. 3406 would
allow these transmission rights to be waived, thereby undermining efforts to pro-
mote fair and equal transmission access.
CFC urges the Subcommittee to delete Sec. 141 and 142 and, instead, amend Sec.
203 of the Federal Power Act to (1) require utility mergers to promote the public in-
terest to be approved, and (2) ensure that FERC has clear authority to review merg-
ers between holding companies, convergence mergers between gas and electric utili-
ties, and generation-only asset sales.
RTO Formation
CFC commends you, Mr. Chairman, for addressing the thorny issue of RTO for-
mation and attempting to forge a compromise. However, we do not believe that
the language contained in H.R. 3406 will promote the grid management needed to
support effective wholesale competition. We believe that Section 202, while attempt-
ing to require full RTO participation, suffers from the following shortcomings:
An unusual judicial review system is established, with the FERC RTO directive
stayed while the proposal undergoes seemingly endless rounds of review and ap-
peal.
The provision is extremely prescriptive and limiting. The California experience
has showed us that the competitive wholesale market is still in its infancy. Un-
fortunately, Section 202 limits the ability of FERC to respond to the markets
growing pains by preventing the Commission from modifying the scope, configu-
ration, governance structure or other key elements of existing RTOs. In addi-
tion, it cannot use its other authorities under the Federal Power Act to require
RTO participation or RTO modification. This legal straightjacket will impede
the natural evolution of RTOs and the market.
The scope and configuration standard appears to provide for self-certification by
the applicant that the RTO is good enougheven if it would otherwise fail
FERCs standard.
A market monitoring standard that lacks effective enforcement authority. While
the independent market monitoring unit would gather information and monitor
tariff compliance, any noncompliance or structural flaws uncovered by these
units are left to the market participants to address.
CFC urges the Subcommittee to replace Sec. 202 with language affirming the au-
thority of the Commission to promote RTOs that produce clear and discernable con-
sumer benefits.
Incentive Rates for Transmission
As CFC testified at the Subcommittees October 10 hearing, we oppose mandated
incentive or performance-based rates for transmission as contained in Sec. 401 of
H.R. 3406. The Federal Power Act currently provides sufficient latitude for adoption
of incentive and performance based transmission ratesprovided that such rates
meet the statutorily mandated just and reasonable determination. Section 401
would effectively redefine the just and reasonable standard and require incentive
rates for transmission service. We similarly would oppose the inclusion of nego-
tiated rates that would violate the tenets of the Federal Power Act.
In an October 25 order, FERC highlighted the problems inherent in a blanket in-
centive rate directive. In that case, the applicant sought performance-based rates for
renovation of a high-voltage line. In rejecting the application, FERC determined
that the proposal did not balance risks and rewards, lacked an effective baseline
against which to measure performance, and created a perverse incentive to allow
the degradation of transmission facilities in order to then reap the later incentive
for renovation work.
CFC urges the deletion of Section 401. If the issue of incentive or performance-
based rates must be addressed, then CFC would urge the adoption of either (1) a di-
rected rulemaking for FERC to determine what actions are needed, consistent with
Sec. 205 and 206 of the Federal Power Act, to promote the efficient expansion and
improvement of interstate transmission networks, or (2) a performance-based rate
standard that mirrors the recent FERC case and determine when such rates would
produce demonstrable beneficial behavior, investment or actions that are unlikely to
occur absent such rates.
FERC Authority on Anti-Competitive Conduct
CFC supports the increase in criminal and civil penalties for Federal Power Act
violations that is contained in Title VII of H.R. 3406. However, this action does not
provide the guidance and tools needed to establish competitive markets, oversight
of those markets, and remedies for market flaws, manipulation and abuse. CFC can-
169
not support electricity legislation that fails to include effective market power provi-
sions.
CFC urges the Subcommittee to include provisions to:
Require the establishment of clear rules defining the conditions necessary for com-
petitive markets and market-based rate authority;
Establish information disclosure requirements and a market monitoring responsi-
bility;
Direct FERC to take any action necessary to penalize violations of market rules,
correct market flaws and imperfections and remedy and mitigate market manip-
ulations and market power abuses; and
Remove the time restrictions on rate refunds contained in existing law.
Affiliate Transactions
Any treatment of market power must also address the potential for abuse in the
area of affiliate transactions. The repeal of PUHCA, the growth of unregulated busi-
ness ventures owned and controlled by utilities and their parent companies, and the
increasingly interstate nature of affiliate operations have all fostered additional op-
portunities for anti-competitive self-dealing, cross-subsidization and cost-shifting.
Such abuses bring with them attendant harm to ratepayers and competition alike.
Neither FERC nor the individual state commissions currently possess the jurisdic-
tion and authority to oversee the relationship between utilities and their affiliates
that engage in unregulated, multistate, non-core business operations. Without prop-
er oversight, these affiliate transactions can lead to unfair competition and higher
rates for captive consumers.
CFC urges inclusion of effective mechanisms to prevent abusive and anti-competi-
tive affiliate transactions. We propose extending Federal Trade Commission authority
to prevent unfair competition and trade practices in energy services markets.
Conclusion
Competitive wholesale electric consumers can produce consumer benefits. How-
ever, those benefits will not materialize, or be consistently available, if the market
is not structured to ensure its competitive functioning. FERC has taken steps, since
the ascension of Chairman Wood, to take the necessary steps. However, the direc-
tion of the Commission can radically shiftthrough changed membership, judicial
challenge and political pressure. We believe that the marketand consumerswill
benefit from statutory support for the general policy direction of the current Com-
mission. Providing clear statutory guidance and tools, consistent with the policies
outlined in our testimony, will foster a robust, competitive market, provide certainty
to market participants, avoid unnecessarily delay, and ensure that consumers ben-
efit.
Consumers for Fair Competition looks forward to working with you to make the
changes necessary to accomplish these objectives.
Mr. LARGENT. Thank you, Mr. Acquard.
STATEMENT OF WILLIAM R. PRINDLE

Mr. PRINDLE. Thank you, Mr. Largent, Mr. Chairman, and mem-
bers of the committee, my name is Bill Prindle, and I am the Direc-
tor of Buildings and Utilities Programs for The Alliance to Save
Energy.
The Alliance is a bipartisan, non-profit, coalition of business, gov-
ernment, environmental, and consumer leaders, dedicated to im-
proving the efficiency with which our economy uses energy.
I would like to talk to you today about energy efficiency, and de-
mand resources, and demand response, and that is part of the
wider world of what we called distributed resources, which includes
renewables and distributed generation in their many forms.
Now, we have known for a long time that efficiency in the other
distributed resources can often be the fastest, cleanest, cheapest
way to meet a large part of our energy needs.
And I would also just like to point out that since September 11th
that we have been forced to also consider the fact that we need to
170
really need to focus more intently on the security of our energy sys-
tems.
So in that light I would add a fourth superlative and say that
efficiency in distributed resources are also the safest way to secure
our energy systems.
Overall, I would like to say that H.R. 3406, while it commend-
ably touches on demand response in Section 103, overall we feel
that it misses a golden opportunity, an opportunity to use distrib-
uted resources and energy efficiency to make electric markets safer,
more efficient, to reduce customer bills, to reduce the risk of black-
outs, and to improve air quality.
I would like to highlight some of the issues and tell you four
things that we would like to see in the bill. First, lets take a look
at the real world and what is going on out there. Now, we see a
few good things happening out in the marketplace, but we dont see
that matched in the way that Federal policy is going.
Now, we have seen that deficiency in distributed resources can
help reduce the risk of blackouts, and can help drive down mar-
ginal prices in wholesale markets, especially at those key peak
times, and can improve air quality.
In the State of New York, Governor Patacki has instituted pro-
grams that among other things replaced 40,000 air-conditioners
last summer, which took several megawatts off the peak.
They also worked with the ISO to encourage pilot programs and
demand response, taking several hundred megawatts again off the
peak there. The State of Texas has been an innovator in using en-
ergy efficiency for air quality compliance.
There is a new State energy code in Texas that is there largely
because there is a need to reduce NOX emissions; and even in the
State of California, regardless of who you would choose to blame
with all the problems that have occurred in California, we now
have some data on how California is working its way out.
In the last year, we know for instance that while about 2,400
megawatts of new supply have come on-line, we have also seen doc-
umentation from the energy commission that 6,600 megawatts of
demand-side resources have come into play in California.
So that is a more than 2-to-1 margin and clearly distributed re-
sources are delivering big time when it counts. So, now lets turn
to the Federal policy world. Earlier this year the FTC issued a re-
port on electricity competition, and they had a chapter on demand-
side resources, and the sub-title of the chapter was, The Sound of
One Hand Clapping.
And I think that phrase kind of sums up the situation that we
have in our electricity markets, where it is all sellers and no buy-
ers. I mean, clearly, we wouldnt want to run a stockmarket that
only put options and no call options.
E-Bay could not survive if only sellers and no buyers were al-
lowed to log on to the system. This is the kind of fundamental
problem that we are facing in our electricity markets today.
There are built-in market barriers that discourage generators
and distribution companies from doing anything to reduce sales. In
fact, their profits only go up as sales go up.
So the question arises, well, what is the Federal role in this, and
why cant the States just take care of this on their own as some
171
of them have been attempting to do. I think the bottom line is that
we are trying to move toward regional and national markets for
electricity.
And in order to do that, we have to have some consistency in
market rules, and we have to have a level playing field as far as
how distributed resources are treated in these increasingly regional
markets.
And I would just ask that people in Oregon who have seen their
prices go up on an average of 30 percent in the last year because
of what happened in California, whether they think that energy ef-
ficiency and electricity matters are a State issue only.
So, let me just give you four things that we would like the com-
mittee to look at in the course of marking up this legislation. The
first is what we call a public benefits fund.
A lot of States have tried this, and more than 20 States are now
using this kind of a tool. Essentially, it establishes a very small
charge on electricity sales of typically one mil.
And what this would do is essentially replace the billion or more
dollars that has been lost in the last 5 or 6 years as States and
utilities have cut back their efficiency programs looking toward
competition.
Nobody knew what was going to happen, and a lot of States and
a lot of companies drop their programs, and this would help to re-
place that resource commitment. The second issue that we want
the committee to look at is an energy efficiency performance stand-
ard, and this was really pioneered in the State of Texas.
Governor Bush signed a restructuring bill that essentially re-
quired utilities to offset 10 percent of their projected load growth
with energy efficiency. I met with people from AEP and Reliant,
and TXU last week, and they are all cranked up and they are going
to spent $75 million next year on programs to implement that.
This approach would simply apply this in a modest way across
the Nation, and would establish a 1-percent target, or electricity re-
tailers to reduce sales, a lot of flexibility and the means to do that.
And even the ability to trade among companies if one company is
not able to meet its target in a particular year.
Most pertinent to Section 103, we have several recommendations
for how to make demand response truly functional in the wholesale
market, and I wont go into all those details.
But our written statement contains three categories of items that
we think are important to include in making demand response
markets work properly, and truly enabling customers to participate
fully.
And finally, Mr. Chairman, and members of the committee, I
would like to emphasize the importance of metering in all of this.
The meter is either the gateway or the barrier for customers to
participate effectively in these markets.
And we have a fundamental problem here in that smart meter-
ing is not in place for most customers. It is for some larger cus-
tomers, but most customers are not able to use this technology.
So we need two things. We need uniform protocol for how meter-
ing is designed and installed so that there can be a national mar-
ket; and second of all, we need a customer right-to-choose that al-
lows a customer to get a smart meter installed if they want one.
172
And no distribution company rule or other red tape should pre-

vent a customer from getting that kind of choice, just as customers
should have the right to choose their power supplier.
With that, I will stop. Thank you for the opportunity to speak,
and I will be happy to answer any questions at this time.
[The prepared statement of William R. Prindle follows:]
PREPARED STATEMENT OF WILLIAM R. PRINDLE, DIRECTOR, BUILDINGS AND UTILITIES
PROGRAMS, THE ALLIANCE TO SAVE ENERGY
Mr. Chairman and members of the Committee, thank you for the opportunity to
speak with you today on energy efficiency and demand response as vital components
of electricity policy. Efficiency and demand response are the cleanest, cheapest, and
fastest ways to match electricity demand with supply, reduce price volatility, cut
electric bills for American families, prevent power outages, and improve air quality.
My name is William R. Prindle. I am Director of Buildings and Utilities Programs
for the Alliance to Save Energy, a bi-partisan, non-profit coalition of business, gov-
ernment, environmental, and consumer leaders dedicated to improving the efficiency
with which our economy uses energy. Senators Charles Percy and Hubert Hum-
phrey founded the Alliance in 1977; our Chairman today is Senator Byron Dorgan,
and our vice chairs are Senator Bingaman, Senator Jeffords and Congressman Ed
Markey.
Over seventy companies and organizations currently belong to the Alliance to
Save Energy. If it pleases the Chairman I would like to include for the record a com-
plete list of the Alliances Board of Directors and Associate members, which includes
many of the nations leading energy efficiency firms, electric and gas utilities, and
other companies providing cost savings and pollution reduction to the marketplace.
The Alliance has a long history of researching and advocating energy efficiency
policies and programs. We also have a long history of supporting energy efficiency
promotion efforts that rely not on mandatory federal regulations, but on partner-
ships between government and business, and between the federal and State govern-
ments. Federal energy efficiency programs at the Department of Energy (DOE), the
Environmental Protection Agency (EPA), and other agencies are largely voluntary
programs that further the national goals of environmental protection, as well as
broad-based economic growth, national security and economic competitiveness.
Electricity Restructuring So Far: The Sound of One Hand Clapping
Mr. Chairman, as we observe the record of electricity restructuring in this coun-
try, we see a mixed picture. While some parts of some markets have been restruc-
tured with varying degrees of success, overall there is a striking imbalance between
policies aimed at the supply side of the industry and those intended to employ the
resources available on the demand side, the customer side of the meter. The Federal
Trade Commission, in its report on restructuring earlier this year, aptly subtitled
the chapter on demand-side resources The Sound of One Hand Clapping, referring
to the almost total lack of focus on demand-side resources in todays markets.
Clearly, we need to do more to make electricity markets truly competitive. Elec-
tricity policy without the proper balance between supply and demand is like a stock
market with all put options and no call options. Buyers and sellers need to be able
to participate fully in a real competitive market, and right now that is not the case
in our electricity markets. Customers are still mostly forced to take prices deter-
mined by sellers, and are not able to realize the full market value of the resource
they can offer from their own operations. We need strong and clear policies that en-
able energy efficiency and demand response to make the contributions they are ca-
pable of making.
Stronger policies for efficiency and other distributed resources are needed in our
electricity policy because in competitive electricity markets operating in the U.S.
today, there are built-in barriers to the development of these resources. For exam-
ple: in a competitive generation market, generators have no financial incentive to
promote either efficiency or load management, and their profits increase with in-
creases in sales and in peak demand. Additionally, under the rate designs used in
most states, wires companies profit from increased throughput, and find their prof-
its harmed by energy efficiency programs. Because of these structural barriers, nei-
ther providers, nor load-serving entities, nor end-users see the real value that de-
mand-side resources can provide to the market and the grid. These market barriers
make U.S. wholesale electric markets more expensive, more volatile, and less reli-
able than they should be.
173
In addition to making markets fairer and more efficient, efficiency and demand
response can help solve the pressing problems facing our electricity systems, such
as:
Increased price volatility. Electric demand has grown faster than was pro-
jected in the early days of restructuring. The Federal Energy Regulatory Com-
missions 1995 projection of national electric demand through 2000 was lower
than actual experience by 4.6 percent 1. In the western, Northeast, and Midwest
markets we have seen unprecedented peak price problems. This stems from sev-
eral factors, but a key is the needless peakiness of demand. These situations
have dramatically illustrated the need to manage demand along with supply.
Effective demand response programs can reduce prices through an entire power
pool, benefiting all customers.
Worsened system reliability. These peak problems have led to blackouts,
brownouts, emergency voltage reductions, and other extraordinary actions by
power pool managers from California to Chicago and New York. While it is im-
portant to boost the reliability of the grid infrastructure, it is typically faster
and cheaper to reduce the overall load on the system first. For this reason the
National Association of Regulatory Utility Commissioners has adopted a resolu-
tion urging Congress to include in energy legislation workable mechanisms to
support cost-effective State, utility, and market participant energy efficiency
programs in order to enhance the reliability of the nations electric system. 2
Increased air pollution. These demand increases have increased interstate air
pollution, especially nitrogen oxides (NOX), which contribute to smog and acid
rain. The 1995 FERC projection of nitrogen oxide emissions turned out to be
4.3 percent lower than actual emissions in 2000 3. Saving energy, especially at
peak times, has an especially strong effect on reducing such air pollution.
Comments on H.R. 3406
We appreciate the fact that the Chairman has included a section in the bill on
demand response in Title 1, Subtitle A, Section 103, in recognition of the fact that
electricity markets should be truly competitive by addressing demand-side re-
sources. While we support the general principles expressed in Section 103, we are
disappointed in the bills broader failure to address energy efficiency and other dis-
tributed resources, such as renewable energy. We want to emphasize that energy
efficiency and demand response, while often compatible, are different and require
different kinds of policy support. Energy efficiency can provide peak demand bene-
fits, and demand response, which is aimed primarily at load management, can also
save energy. It thus essential to address both efficiency and demand response ex-
plicitly in H.R. 3406.
We believe that more substantial and specific measures are needed to create a
better balance between supply-side and demand-side resources. We also suggest the
Committee take advantage of the research done by the states in testing various
electricity policy options. The states have experimented with a variety of efficiency,
distributed-resource and renewable policy options in restructuring their electricity
markets. These have included public benefits funds, efficiency performance stand-
ards, and renewable portfolio standards. We support all of these as part of a bal-
anced electricity policy, and commend them to the Committee as worthy of its con-
sideration.
In the context of energy efficiency and demand response in H.R. 3406, we respect-
fully ask the Committee to consider additional provisions for the policies described
below.
A Public Benefits Fund. We need a federal public benefits fund to reverse the
decline in public benefits spending over the last several years. Over the last two
decades, states were able to use Integrated Resource Planning to generate a net-
work of utility demand-side management programs that succeeded in avoiding the
need for about 100 300-Megawatt powerplants 4. However, utility spending on these
programs has been cut by half as the electricity industry has been deregulated. To
offset the lost benefits in reducing peak demand, cutting customer bills, helping low-
income people, and supporting the development of new technology, the Alliance sup-
1 North American Commission for Environmental Cooperation, A Retrospective Review of

FERCs Environmental Impact Statement on Open Transmission Access, 19 October 2001
2 Resolution Supporting Energy Efficiency and Load Management as Cost-Effective Ap-
proaches to Reliability Concerns, NARUC (July 23, 1999). See also, R.Cowart, Efficient Reli-
ability: The Critical Role of Demand-Side Resources in Power Systems and Markets, published
by NARUC in June 2001.
3 NACEC, Op. cit.
4 U.S. Department of Energy. Energy Information Administration. U.S. Electric Utility De-
mand-Side Management 1999. http://www.eia.doe.gov/cneaf/electricity/dsm99/dsmsum99.html
174
ports the creation of a federal public benefits fund to support these state-based pro-
grams.
The energy efficiency programs run by states in the 1980s and 1990s have been
not only successful in their primary goal of saving energy, they have also been good
for the economy. The Rand Corporation issued a report in 2000 that quantified the
benefits of Californias utility energy efficiency programs, finding that between 1980
and 1995, utility efficiency investments generated roughly $1000 in returns for
every $1 spent. Rand also found that the overall economic benefit to the state from
these programs was responsible for 3 percent of the California gross state product
in 1995. A Public Benefits Fund would thus be an economic stimulus, helping to cre-
ate jobs and new business opportunities in this time of economic uncertainty.
The fund would come from a non-bypassable charge on electricity, which would
then go to match state expenditures on energy efficiency, low income programs, re-
newable energy, and state-based research and development. States are spending
about $1.7 billion this year on public benefits programs, including efficiency, renew-
ables, low-income programs, R&D, and related public goods. A federal match at this
level would raise another $1.7 billion annually. The residential share of this would
amount to about $12 per year per family-or about a dollar a month. Over time, the
savings generated by the fund will likely drive the net cost into net savings.
The benefits would be enormous; they are projected to include: 130,000 Megawatts
of electric capacity savings by 2020 (equivalent to about 400 powerplants); 1.24 tril-
lion kWh saved over 20 years, cutting consumer energy bills by $100 billion; and
150,000 tons of nitrogen oxides emissions avoided.5
The public benefits fund is off-budget, providing an efficient way to support the
states in their efforts to respond to their mandates for reliability, clean air, and af-
fordable energy. A dollar a month is a very small price to pay for keeping the lights
on, the air clean, and energy bills down.
An Energy Efficiency Performance Standard. The state of Texas has pio-
neered this approach in its electricity restructuring bill by requiring that utilities
achieve a 10% reduction in their load growth forecasts. The energy efficiency per-
formance standard would mirror this approach at the national level by setting a
uniform national goal for energy savings that is implemented at the state level. The
requirement to achieve energy use savings would apply to electricity retailers (or
load-serving entities). They would report compliance to state utility regulatory
commissions (or, in the case of public power, to their governing boards), who would
be responsible for verification and enforcement. Federal agencies, including the En-
vironmental Protection Agency and the Department of Energy, would set uniform
national energy savings measurement and verification protocols, as well as guide-
lines for forecasting and reporting.
The uniform national standard would require each electricity retailer to arrange
for and document modest, attainable, cost-effective savings as a percentage of sales
and peak demand. Based on two decades of state and utility experience, a 1% target
in terms of annual forecast electricity sales and peak demand is appropriate. Each
year, electricity retailers would determine the energy savings that were achieved,
according to the national protocols. Retailers would compare these savings to fore-
cast sales, determine whether they met the 1% goal, and report this information to
the utility commission.
The annual energy savings requirement would be cumulative. That is, each re-
tailer would incorporate past savings into subsequent years forecasts, and would
achieve a 1% savings target for each succeeding year based on those forecasts. A
1% annual increase in energy efficiency is a fairly modest goal that is comparable
to the savings that have been achieved under state demand-side management and
other efficiency programs. To make compliance easier, the standards and reporting
requirements could be set on a multi-year basis, as long as the overall cumulative
savings target is met.
Electricity retailers would also have programmatic flexibility to meet the perform-
ance goal. The range of traditional and newer demand-side options includes ap-
proaches such as appliance and lighting rebate programs, new construction effi-
ciency programs, real-time metering and pricing, performance contracting, consumer
education campaigns, and low-income weatherization programs. The energy effi-
ciency performance standard would also include a trading provision, which would
allow a retailer that exceeded the standard to sell its excess efficiency credits to
another retailer.
5 Alliance staff analysis based on: U.S. Department of Energy. Energy Information Adminis-
tration. U.S. Electric Utility Demand-Side Management 1999. http://www.eia.doe.gov/cneaf/elec-
tricity/dsm99/dsmsum99.html
175
Specific wholesale market rules that support distributed resource par-
ticipation. Section 103 sets forth laudable goals and principles, but more specifics
are needed to fully capture the potential for demand response, energy efficiency, and
other distributed resources that this section seeks to encourage.
We recommend the Committee consider the following additional provisions in Sec-
tion 103:
Demand-side Participation in Ancillary Service Markets. FERC should require that
market rules allow demand-side resources to supply ancillary services on an
equal basis with supply-side resources. The criteria for supplying ancillary serv-
ices should be written in technology-neutral terms, and should not require cost-
ly telemetry and metering for individual demand-side resources whose perform-
ance could be verified on a statistical, aggregated basis.
An Efficient Reliability Standard. RTOs, reliability managers, and transmission
owners often seek cost recovery in FERC-approved tariffs for investments in-
tended to enhance system reliability. Before granting recovery in transmission
tariffs or uplift charges that would recover those costs, FERC should require ap-
plicants to show that the benefits are broadly dispersed, and that they have se-
lected the lowest-cost resource, including demand-side resources, reasonably-
available to meet the need in question.
Before approving wholesale energy or transmission rates to recover the costs
of a proposed reliability-enhancing investment in transmission facilities or an-
cillary services, the FERC should examine the relevant wholesale market and
transmission access rules to ensure that price-responsive, distributed, and de-
mand-side resources may compete on an equal basis with supply-side and trans-
mission alternatives. It should require the applicant for cost recovery in rates
to demonstrate that it has taken a hard look at transmission, generation, de-
mand-management, and other distributed resources to meet the congestion re-
lief or reliability need in question. Before approving such rates, the Commission
determine whether:
(1) the relevant market is fully open to demand-side as well as supply-side re-
sources;
(2) the proposed investment or standard is the lowest cost, reasonably-available
means to correct a remaining market failure; and
(3) benefits from the investment or standard will be widespread, and thus ap-
propriate for support through broad-based funding.
FERC Authority to Approve Regional Reliability Charges. While it is un-
derstood that distributed resources and demand management investments may
be both quicker and less expensive means of enhancing reliability than remote
central stations and new transmission lines, some observers question whether
FERC has the authority to include the costs of demand-side and distributed re-
liability programs in wholesale rates and transmission tariffs. FERC should be
given the mandate and the authority to recover the costs of traditional trans-
mission investments AND non-transmission alternatives in rates.
FERC should, by rule or order, require jurisdictional transmission providers
and RTOs to examine region-wide, reliability-enhancing investments in de-
mand-side resources that would improve reliability and lower power costs.
When supported by cost-effectiveness analysis, those utilities and RTOs should
be permitted to recover those investments on the same basis as regional trans-
mission investments, ancillary service costs, or other RTO expenses.
Standards for time-based metering and communication technology. The
electric meter is the essential gateway through which many distributed resources
are enabled, especially demand-response strategies. Without advanced metering ca-
pable of time-internal recording and digital communication, most customers will be
frozen out of the market for many demand-side resource options. At present, the
vast majority of users are neither aware that energy prices vary based on time of
day nor do they have any financial incentive to shift usage to times of lower produc-
tion costs. By varying prices by time of day, and by providing users with easy access
to this price signal, users can shift usage and reduce their bills. The overall result
is a more efficient market.
With advanced metering equipment, users can get the information they need
when they need it and adjust their energy use not just to reduce their bill but to
use less energy overall. This was demonstrated by Puget Sound Energys efforts
begun last December to provide time-of-use information to over 400,000 of its resi-
dential customers. Strictly an informational program at its outset, Puget has re-
ported that 79% of its residential customers and 70% of business customers had
taken action to alter their energy use and that 41% and 45%, respectively, reduced
their usage. A recent survey showed that 89 percent of participants said the pro-
176
gram has encouraged them to shift some of their power use to off-peak hours. Forty-
nine percent said they have cut their overall energy consumption.
Additionally, power-usage data indicate that variable, time-sensitive rates are
saving energy as well as shifting time of use among Puget customers. Residential
customers paying time-of-day rates shifted about 5 percent of their electricity usage,
on average, away from the morning and early evening hours when public demand
for powerand wholesale power pricesare highest. In addition, these customers
reduced their overall electricity usage in June by more than 6 percent compared to
their June 2001 usage.
Time-based metering and communications, and the new capabilities that it pro-
vides energy users, is an essential pre-requisite for the effective application of en-
ergy efficiency and demand response as resource options. It is thus important that
Congress, support the acceleration of the installation, deployment and use of ad-
vanced metering and communications technology. We ask that the Committee re-
quire in Section 103 the development of uniform national metering protocols to en-
sure that the new market for interval metered data and time-sensitive information
and pricing is created in a manner that is orderly, cost-effective, and not confusing
or impractical. This will ensure that those who want to pursue demand response
and related programs will not be thwarted by technology issues. The Alliance is
working with companies in this field who are forming a coalition to advance policy
thataccelerates the deployment ofthesetechnologies, and we will be pleased to
offer the Committee further input as it moves forward on this issue.
It is also important that customers who want to use advanced metering not be
thwarted by outdated utility rules. We thus urge the Committee to include provi-
sions that ensure customers who want better metering are not prevented from doing
so by distribution utility rules. With national protocols in place for metering, utility
concerns about safety, accuracy, and security will have been addressed.
As with other new technologies for energy efficiency or sustainable energy use, it
is important for Congress to provide financial assistance for more rapid deployment
of advanced meters and demand response programs. We want to underscore our
support for the tax credit included in H.R. 4 for advanced metering equipment as
a vital stimulus for those who would implement the demand-response programs
under Section 103.
In summary, energy efficiency, demand response, and other distributed resources
are essential to a balanced electricity policy. We have offered several policy options,
and we hope the Committee will give due consideration to our recommendations.
Thank you, Mr.Chairman, for the opportunity to share our views with the Com-
mittee today. I will be happy to answer any questions you might have.
Mr. LARGENT. Thank you, Mr. Prindle. Mr. Hyman.
Mr. SAWYER. Mr. Chairman, is it possible to break? I would real-
ly like to hear Mr. Hymans testimony, but if I sit here and wait,
I am not going to get my vote in.
Mr. LARGENT. The problem is that Mr. Hyman has to leave. It
is my understanding that he can give his testimony, and we still
will have time to sprint over there and vote.
Mr. SAWYER. Okay. We are not going to be able to ask him any
questions anyway then.
Mr. LARGENT. Oh, thats right. Yes, we are not go able to do that
anyway, no matter what we do.
Mr. SAWYER. I will read his testimony.
Mr. LARGENT. Do you have a question for him right now?
Mr. SAWYER. No, thats all right. Thank you.
Mr. LARGENT. Mr. Hyman.
Mr. HYMAN. I will be brief. I know that you are hungry.
Mr. LARGENT. Hold on, Mr. Hyman. Tom, do you have something
specific that you want to ask him that maybe he could address in
this statement right now?
Mr. SAWYER. No, I dont.
Mr. LARGENT. Okay. Mr. Hyman.
177
STATEMENT OF LEONARD S. HYMAN
Mr. HYMAN. Thank you. Payments to the transmission sector ac-
count for about 8 percent of the electric bill. Yet, transmission
plays a crucial role in providing reliable service, and competition
is not going to work if we dont have a robust transmission network
that brings competitive power to consumers.
The transmission sector has not kept up with the expansion of
the industry over the past 15 years. It is designed for the old utility
era, and transmission expansion plans for the next decade seem
even less adequate.
I am not proposing that we declare a problem, and then mandate
a solution consisting of building so many lines of new transmission.
We can employ new technologies that enhance the abilities of the
network to handle more traffic.
We can encourage the network operator to find ways to operate
the existing system more efficiently, and we can employ distributed
resources and market-based incentives to consumers to reduce the
stress on the network.
We cant do any of this, however, without a regulatory system
that incentivizes the network operators to invest in the network, or
to find the best operational solution. If all an incentive does is raise
prices, it is not an incentive. It is just a give-away.
For the moment, I think the industry is mired in debates about
processes, and governance, and how to form large entities. I dont
hear very much about business plans or about customers.
And I dont really see how these organizations are going to ex-
pand their networks more effectively than the old power poles.
These seem to be entities with one customer that counts, and that
is the regulator, and that is not much of a change from the old re-
gime.
Now, everyone wants to see the formation of transmission opera-
tors that are truly independent from market players. But I really
dont see the regulators or the government officials getting to work
on concrete steps that will remove a lot of the perceived barriers
to structural separation of transmission from the rest of the utility.
There are very serious tax and accounting issues that can be
dealt with and should be. I personally would rather see truly inde-
pendent transmission systems whose sole business is serving trans-
mission customers, rather than these convoluted structures that
engender so much suspicion in the market.
Now, the proposed legislation addresses some of these issues.
Section 202, for instance, makes it clear that utilities should not
escape from the obligation to put their transmission under the con-
trol of an independent entity.
But it does not remove road blocks to really cutting the ties be-
tween the utilities and the transmission business, and it doesnt
create an environment in which the transmission owner runs a
company whose prosperity depends entirely on its ability to satisfy
transmission customers.
And it does not deal with the disincentive to investment that
could come about by placing ones assets under control of an entity
that is not responsible for the commercial success of these assets.
Section 216 requires FERC to establish incentive rate making
standards that would ensure reliability, as well as attract capital
178
for expansion, and this is long overdue. In other countries, utilities

run on this basis.
And I think that incentive-based regulations could encourage the
implementation of new technologies, and encourage innovative
management in financial procedures. Incentive regulation, I have
to emphasize those, has an upside and a downside, and that means
that the firm that doesnt meet the standards comes out behind
and suffers a penalty, and thats fine with me.
What I am not clear on is how FERC will give meaningful incen-
tives to the transmission owners, the people who receive the re-
turns, when the presumably non-profit regional transmission orga-
nization operates the system.
The incentives presumably should reward those who make the
decisions in order to encourage better decisionmaking and the pen-
alties should go to those who make the poor decisions, and right
now there is going to be a disconnect.
Now, I think by focusing on specific customer friendly goals, and
by encouraging the use of the regulatory framework that promotes
an expandable and reliable transmission network, I think this bill
should contribute to the development of more competitive markets
and more reliable service.
And just as an add-on, even if you assume the most obscene re-
turns to the transmission entities, it is only 8 percent of the bill.
You dont really need to do very much. The customers would never
notice. My own feeling is that they shouldnt notice.
I think it is imperative though that whatever system is devised,
it has to have an incentive to attract capital for ongoing investment
in the business. Thank you.
[The prepared statement of Leonard S. Hyman follows:]
PREPARED STATEMENT OF LEONARD S. HYMAN, SENIOR INDUSTRY ADVISOR TO
SALOMON SMITH BARNEY
Payments to the transmission sector account for less than 10% of the electric bill.
Yet, transmission plays a crucial role in providing reliable service. And competition
will not work, if we dont have a robust transmission network that brings competi-
tive power to consumers.
The transmission sector, however, has not kept up with the expansion of the in-
dustry, and it operates with a network designed for the old utility era. Expansion
plans for this decade seem even more inadequate. I would not, however, propose
that we declare a problem, and then mandate a solution consisting solely of building
so many miles of new lines. We can employ new technologies that enhance the abil-
ity of the network to handle more traffic. We can encourage the network operator
to find ways to operate the existing system more efficiently. And we can employ dis-
tributed resources and market-based incentives to customers to reduce stress on the
network. We cant do any of this however, without a regulatory system that
incentivizes the network operator to invest in the network or to find the best oper-
ational solution. Right now, we do not have that, and our regulators seem far away
from proposing it.
For the moment, the industry seems mired in debates about the process needed
to form large transmission entities and to determine their governance procedures.
I do not hear much about business plans, or customer service, or specifics about how
these organizations will expand their networks more effectively than the old power
pools. These seem to be entities with one customer that counts: the regulator. Thats
not much of a change from the old regime.
Almost everyone wants to see the formation of transmission operators that are
truly independent from market players. Yet I dont believe that regulators or gov-
ernment officials have yet to put into effect the concrete steps needed to remove the
perceived obstacles to structural separation of transmission from the rest of the util-
ity. I would rather see truly independent transmission systems whose sole business
is serving transmission customers (which involves willingness to invest in new
179
wires, new technologies and even normal system maintenance), rather than con-
voluted structures that seem to engender suspicions in the market.
The proposed legislation addresses many of these issues.
Section 202 makes clear that utilities cannot escape from the obligation to put
their transmission under the control of an independent entity, but it does not re-
move any of the roadblocks to really cutting the ties between the utility and the
transmission business. It does not create an environment in which the transmission
owner runs a company whose prosperity depends entirely on its ability to satisfy
transmission customers. It does not deal with the disincentive to investment that
could come about by placing assets under control of an entity not responsible for
their commercial success.
Section 216 requires FERC to establish incentive ratemaking standards that
would ensure reliability as well as attract capital for expansion. This is long over-
due. Other countries regulate utilities on this basis. Incentive-based regulation could
encourage the implementation of new technologies and encourage innovative man-
agement and financial procedures. Incentive regulation, of course, has an upside and
downside. The firm that does not meet the standards comes out behind: that is, suf-
fers a penalty. What I am not clear on is how FERC will give meaningful incentives
to transmission owners, when the presumably non-profit regional transmission orga-
nization operates the system. The incentives, presumably, should reward those who
make the decisions, in order to encourage better decision-making, and the penalties
go to those who make poor decisions.
By focusing on specific customer-friendly goals and by encouraging the use of a
regulatory framework that promotes an expandable and reliable transmission net-
work, this bill should contribute to the development of more competitive markets
and more reliable service. It is imperative, though, that whatever system is devised,
there is incentive to attract capital for ongoing investment in the business.
Mr. LARGENT. Thank you, Mr. Hyman.
Mr. Johnston, are you ready to give your statement?
Mr. JOHNSTON. Yes, I am.
Mr. LARGENT. All right.
STATEMENT OF ROBERT JOHNSTON
Mr. JOHNSTON. My name is Bob Johnston, and I am here today
representing The Large Public Power Council, which is a group of
the 24 largest public power systems in the country, owning 44,000
megawatts of generation, and 26,000 miles of transmission.
First of all, LPPC would like to thank Chairman Barton for his
support, continuing support, of the industrys private use relief
needs, and we would also like to thank the Chairman for the PVA
consensus language in the bill. Our members strongly support that
language.
LPPC has supported comprehensive legislation for years, but at
the present time we are unable to support H.R. 3406 in its present
form. We have some major issues, and I would like to address three
of those today.
Uniform refund authority, Section 702. LPPC has supported the
FERC-lite industry compromise which requires us to offer open ac-
cess transmission services to all parties at rates that are com-
parable to those that we charge ourselves, eliminating the potential
for discrimination.
But it did not give FERC full rate making authority over our
transmission, which has traditionally been at the State and local
level. However, the uniform refund authority provision completely
negates the FERC-lite provision because it gives FERC full author-
ity to set the level of public power transmission rates, and to re-
quire refunds as it deems appropriate.
This is exactly what we thought we were avoiding when we
bought into the FERC-lite compromise. The section also gives
180
FERC the authority to start proceedings to reset our wholesale en-

ergy rates for sales to jurisdictional entities and require retroactive
refunds once FERC decides what the rates should have been.
This would be the worst kind of after-the-fact regulation, where
we dont know the rules up front, and months or years later, we
are told to make refunds. This simply doesnt work for public
power.
When we make a sale into the wholesale energy market, those
net revenues, if any, go directly back to our customers to lower
their rates. If FERC comes back to me a year or more later and
says make a refund on a transaction, what they are effectively
doing is saying going to your end-customer and levy a charge.
That simply does not work and in effect the unintended con-
sequence will be to remove much of public powers excess energy
from the wholesale market, which I dont think is in the public in-
terest.
Regarding RTO mandates, the bill gives FERC the authority to
order public power transmission owners into RTOs, and I have a
few points regarding this mandate. Basically, the first is that we
dont feel that it is necessary.
Virtually every one of the LPPCs transmission owners, which
represents the bulk of public power transmission in this country,
already is in an ISO, has sponsored an RTO, or filed it, or is in
serious negotiations with other utilities to create an RTO.
Furthermore, we have unique features that must get addressed
as part of our negotiations into the RTO. We have tax issues, and
bond indenture issues, State law and State statute issues, and
probably, and most importantly, native load protection issues that
have to get addressed before we can enter the RTO.
We are successfully addressing those issues through these nego-
tiations that we are involved in, and I particularlymy utility in
particular, SeTrans, negotiations are successfully addressing these
issues if we could be allowed to complete that process.
However, if you put a mandate in place, you are effectively re-
moving the incentive for the parties at the table to negotiate these
issues. The bill in its present form does not require the RTOs to
accommodate these public power issues.
Further, it does not require FERC to accommodate these issues.
Therefore, if you apply the mandate, thereby removing the incen-
tive to negotiate these issues, we dont believe that the issues will
get successfully negotiated.
Public power will be the first to stand up and join RTOs if we
can simply be allowed to negotiate these issues, and if the RTOs
bring value, which is the last issue regarding RTOs that I would
like to mention.
We need independent, comprehensive cost benefit analysis by re-
gion for the operating expenses and startup expenses of these
RTOs so we will know the predictable costs and performance of
these RTOs.
There is a big disconnect right now between what the actual
costs and benefits that we are seeing incurred, versus the theo-
retical or philosophical debate regarding RTO cost benefits, and I
want to give you a specific example.
181
The New York ISO originally estimated its operating costs would
be $40 million. The costs today exceed $100 million. And that is
five times the annual operating budget of its predecessor, the New
York Power Pool, and these numbers are still increasing.
And this is not a unique situation. This is a common theme
throughout the country. We estimate that over $1 billion has been
spent to date in RTO startups and we are just getting started.
There will be billions more spent in startup, and there will be
billions spent in operating costs, and we must be able to dem-
onstrate to our governing bodies that RTOs will provide benefits to
our consumers who will ultimately pay this bill.
Last, mergers. If you repeal PUHCA, we need to strengthen
FERC merger authority, and not repeal it. Specifically, you should
clarify FERCs authority to review holding company mergers and
sales of generation facilities to protect consumers from market
power abuse.
Thank you, Mr. Chairman. We appreciate you allowing us to par-
ticipate in this. We look forward to continuing to work with you
and your staff to develop these important energy legislation.
[The prepared statement of Robert Johnston follows:]
PREPARED STATEMENT OF BOB JOHNSTON ON BEHALF OF THE LARGE PUBLIC POWER
COUNCIL
My name is Bob Johnston and I am the President and Chief Executive Officer of
MEAG Power, located in Atlanta, Georgia. I am testifying today on behalf of the
Large Public Power Council (LPPC), an association of 24 of the largest public power
systems in the United States. LPPC members directly or indirectly provide reliable,
affordably-priced electricity to most of the 40 million customers served by public
power. We own and operate over 44,000 megawatts of generation and approximately
26,000 circuit miles of transmission lines. LPPC members are located in states and
territories representing every region of the country, including several states rep-
resented by members of this Subcommitteesuch as Georgia, Tennessee, Texas,
California, New York, and Arizonaand include several state public power agencies
as well.
Mr. Chairman and members of the Subcommittee, the LPPC appreciates your ef-
forts to develop comprehensive electricity legislation. The LPPC has long taken an
active and progressive role in supporting the development of a competitive, efficient
wholesale power market of benefit to all consumers. We appreciate the efforts this
Subcommittee has made to advance the debate on how to achieve benefits for elec-
tricity consumers and we would like to offer the Large Public Power Councils con-
tinued assistance in this process. During the debate on these issues in the last Con-
gress, the LPPC provided our input to the Committee and contributed our views to
the debate. This session, we have testified before the Subcommittee on three other
occasions and have worked with members and their staff in a cooperative fashion.
We appreciate the opportunity to continue our involvement. We appreciate the sup-
port the Chairman has provided for our agreement on private use. In addition, on
behalf of our members from the Tennessee Valley, I want to make sure I thank the
Chairman and the Subcommittee for including the consensus language in your bill.
However, we have serious concerns other provisions with H.R. 3406, particularly
with respect to (1) mandating the participation of public power in regional trans-
mission organizations (RTOs), (2) subjecting public power to virtually all of FERCs
ratemaking authority through the uniform refund authority provision and (3) the re-
peal of FERCs authority to review mergers and asset sales.
I would now like to comment more fully on the issues that are the focus of the
Subcommittees attention today.
PUBLIC POWER SYSTEMS ARE UNIQUE
What does it mean to be a public power system? Public power systems are owned
by the communities we serve, not by investors. We are not-for-profit entities, which
makes us different. Public power systems exist for a variety of reasons and were
often created in response to specific concerns. Public power systems first appeared
in the United States in the late 1800s and many were created as a part of the city
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government. In fact, many LPPC member systems continue to provide additional
services to their communities, such as flood control and natural gas, water and
wastewater services.
Initially, electric service was used for public services, such as street lights, and
was not generally available to residential customers. However, this changed rapidly
and electricity became the essential service it is today. Electricity is a vital compo-
nent of our lives now and, as was demonstrated in California last summer, a corner-
stone of the economy. Consumers confidence is shaken and there are dire con-
sequences if electricity is not reliable and affordable. LPPC members are generally
obligated to serve their native load customers by state law and, as a result, all
available resources go first to serving those customers. Power is sold and surplus
transmission made available only if it is surplus to those needs.
Our rates reflect the fact that we are not-for-profit entities. Our rates include only
the costs of producing and delivering power to our customers and, in some cases,
payments to our governing boards or municipal entities as a component of the local
budget. Investor-owned utility rates are set to include profits paid to shareholders.
Since public power systems are locally controlled, decisions about policies such as
rates are made by people who are in touch with local concerns. The city council sets
policies for many LPPC members, while other public power systems have a sepa-
rately elected or appointed utility board that governs their policies. Local control
helps ensure that we respond to community needs. In addition, since public power
systems are community based, our revenues stay close to home. This helps keep the
local economy strong. Moreover, the policies of public power systems are often de-
signed to promote business participation and investment in the community.
My company, MEAG Power, was created by act of the Georgia General Assembly
in 1975. Now one of the nations largest joint action agencies and doing business
as MEAG Power, the organization is the all-requirements wholesale electricity pro-
vider to 48 Georgia municipalities. These cities formed MEAG Power and issued
over $4 billion in municipal bonds for the purchase of generation and transmission
facilities in order to ensure reliable, economical electric service.
Another LPPC member system, the South Carolina Public Service Authority
(Santee Cooper) was established by the South Carolina legislature in 1934 for the
benefit of all the people of South Carolina and for the improvements of their health,
welfare and material prosperity. Specifically, it was chartered because the state
needed to build a dam on the Santee River, for flood and malaria control as well
as electricity production. However, since the state lacked funds, the federal govern-
ment provided financial assistance. The federal government required that the recipi-
ent of the funds be a state agency in charge of the projectand so, Santee Cooper
was created. Since that time, Santee Cooper has functioned as an independent state
agency, providing reliable electric services to the citizens of South Carolina at rates
which are lower than those of other utilities in South Carolina and lower than the
national average.
Public power systems have been created, in some instances, to resolve specific
problems and address local concerns, filling a role that an investor-owned utility
could not. For example, the Long Island Power Authority (LIPA) was established in
1986 by the state legislature to resolve a controversy over the Shoreham Nuclear
Power Plant (Shoreham) and to achieve lower utility rates on Long Island. Created
as a corporate municipal instrumentality of the State of New York, LIPA was au-
thorized under its enabling statute to acquire all or any part of the securities or
assets of the Long Island Lighting Company (LILCO) on a negotiated or unilateral
basis and to issue lower cost, tax-exempt debt to finance the acquisition. LIPA was
able to resolve the issues relating to the Shoreham facility and acquire LILCOs as-
sets, as well as delivering significant rate reductions.
Public power is different from investor owned or cooperative utilities. We have a
unique mandate and unique operating conditions, as well as some statutory con-
straints. These must be accommodated in regulation and legislation before public
power can join in the effort to achieve consumer benefits through competition.
LPPC BELIEVES THAT THE IMPOSITION OF MANDATORY RTO MEMBERSHIP CONTAINED IN
H.R. 3406 IS UNNECESSARY.
The LPPC opposes the concept of an RTO mandate for public power. Title II, sec-
tion 202, of H.R. 3406 would provide the Federal Energy Regulatory Commission
(FERC) with the authority to order all transmitting utilities to join an RTO. As
you know, public power entities are not public jurisdictional utilities under the Fed-
eral Power Act. Congress established this jurisdictional line for good reason. In con-
trast to investor-owned utilities that seek to return profits to their shareholders,
public power is an arm of municipal or state government, is subject to their over-
183
sight, has no shareholders, and is unambiguously devoted to serving its customers.
This remains true today and, as a result, public power systems must answer to state
and local governments for our actions. In addition, LPPC members have unique con-
straints on our ability to join RTOs.
Providing FERC with the authority to order public power systems into RTOs is
unnecessary. Such an extension of FERC jurisdiction is also unwarranted. The vast
majority of LPPC members are active participants in existing ISOs or in developing
RTOs in their region of the country, as shown in the chart attached to my testi-
mony. For example, our New York members, the New York Power Authority and
the Long Island Power Authority, have been active participants in the New York
ISO and are working to integrate that system into a larger Northeast RTO. Three
large public power systems in the Southeast, MEAG Power, Santee Cooper, and
Jacksonville Electric Authority, are participating in the discussions to create
SeTrans in the Southeast RTO mediation. A number of public power entities have
announced that they will participate in the development of transcosspecifically,
the Salt River Project is participating in the development of WestConnect while Ne-
braska Public Power District and Omaha Public Power District will both join
TransLink. LPPC members typically do not own keystone transmission assets that
put them at the center of RTO development. However, public power wants to par-
ticipate if it is not contrary to its customers interests and the requirements of state
and local law.
LPPC member systems are actively participating in the formation of RTOs. We
must, however, stress again that there are legal constraintssuch as private use
tax restrictions, bond indenture requirements, and state statutory obligationsthat
are unique to public power, which must be addressed before we are able to partici-
pate fully in RTOs. If this legislation is enacted as drafted, public power systems
will be mandated into RTOs without the flexibility to work through the constraints
unique to public power and without the leverage we have in voluntary negotiations.
FERC has required that transmission-owning investor owned utilities join RTOs.
We accept and, in some cases, welcome the establishment of RTOs to support com-
petition and we want to achieve all possible benefits for our customers. LPPC mem-
bers, however, lack the size and scope to create our own RTOs. As a result, we must
negotiate the terms of participation with investor-owned utilities so that our unique
constraints are accommodated. For example, my company, MEAG Power, has par-
ticipated in the discussions on a Southeast RTOSeTranswith other public
power systems and investor-owned utilities. MEAG Power has an obligation under
state statute to serve our native load and, therefore, our participation in SeTrans
was predicated on an ability to preserve the capacity necessary to provide power to
these customers. Through negotiations, we believe we will be able to grandfather
in our native load obligations and obtain recognition of our pre-existing trans-
mission rights. Under proposed SeTrans policies, we would not be required to curtail
our native load unless all other mitigation measures have been attempted. This will
allow us to fulfill our obligations to our customers imposed by state law. However,
the same solution would not work for all public power entities. Unfortunately, ac-
tions at FERC or in legislation may undercut the voluntary efforts underway in
many regions, e.g., the SeTrans RTO proposal in the Southeast, that have accommo-
dated public power.
In a similar manner, two of LPPCs Midwest members, Nebraska Public Power
District (NPPD) and Omaha Public Power District (OPPD), will join TransLink, an
independent transmission company that will own and operate transmission facili-
ties. Participants include both investor-owned utilities and public power systems.
The members can either sell their assets to TransLink or lease them, in which case
they will sign an operating agreement with the transco. NPPD will continue to own
its own transmissionunder state law, ownership by others is not permitted. NPPD
also retains functional responsibility vis-a`-vis its native load, another requirement
imposed by state law. In addition, NPPD can override operating directions from the
transco in the case of a public emergency.
However, were the participation of public power mandated, as provided for in H.R.
3406, these examples of transcos and RTOs would not have been created. In the
Southeast, for example, the FERC administrative law judge recently expressed a
preference for another model, GridSouth. If MEAG Power and other public power
systems were under a mandatory obligation to join this RTO, we would be in viola-
tion of our state laws. GridSouth requires all participants to sign a uniform agree-
ment for operation of the assets, or else the participant must divest itself of the as-
sets. At least one of the public power participants in SeTrans, Santee Cooper, would
be precluded from joining GridSouth due to the absence of the flexibility present in
the SeTrans model. Under South Carolina law, Santee Cooper is only authorized to
sell surplus property and must maintain assets sufficient to serve its local cus-
184
tomers. In order to joining GridSouth, Santee Cooper would either sign the uniform
agreement which makes no accommodation for private use restrictions or state law
constraints or it would have to divest its transmission assets. If participation in
GridSouth was mandated, Santee Cooper would be in the untenable position of vio-
lating state law and operating contrary to its organic statute. This raises significant
legal issues, whose resolution could add years to the process of RTO formation.
However, the SeTrans model does not require that ownership of the transmission
assets transfer to the RTO and allows contracts to be negotiated on a company-by-
company basis, thereby allowing for the resolution of the unique challenges of public
power in this region.
Simply put, since public power systems have retained the legal responsibility to
meet the energy needs of their native load customers, they must maintain and re-
tain resources to ensure the capability to supply such energy. Sufficient generation
assets and assured transmission access are required to ensure that the energy needs
of customer-owners are met in a reliable and cost effective manner. State and local
laws place requirements on public power systems not present for investor-owned
utilities. Unlike an energy marketer who wants firm transmission rights to support
a sales contract, we must preserve adequate capacity to supply our customers due
to an obligation to serve imposed by state law.
Finally, many of our members are concerned that RTO participation could lead
to increased transmission costs and unexpected operating costs which would com-
promise our low-cost service to our customers. Provisions in H.R. 3406 ask for cost-
benefit analysis to justify RTO proposals. We agree. Independent, detailed, cost-ben-
efit analysis must be done to assure participants of predictable costs and perform-
ance which can be part of a proposed RTO. The New York ISO originally estimated
that its annual operating costs would be $40 million. However, those costs are cur-
rently $100 million (five times the annual operating budget of its predecessor the
New York Power Pool) and increasing. This results in significant charges to the
members of the ISO and, ultimately, may result in a significant rate increase for
their consumers. Public power would like to capture the benefits of competition for
our customers, but we need to make assurances to our governing entities that con-
sumers will not bear an inordinate cost burden. The LPPC believes that good cost-
benefit analyses are necessary to assess the impacts of RTOs on the local or regional
market and on the customer. The costs associated with the creation of an RTO or
ISO are significantthe New York ISO incurred startup capital costs of $60 million
and approximately $80 million was spent on GridSouth before the negotiations were
abandoned. We want quantifiable benefits for our customers. We are concerned
about startup and operating costs of the RTO or ISO. Without independent, de-
tailed, quantitative cost-benefit analysis, we will have tremendous difficulty in as-
suring our governing bodies that these structures benefit our customers. Our ulti-
mate objective as public power is to ensure reliable electric service at reasonable
rates. Therefore, we urge the Chairman make certain that the benefits of RTOs and
ISOs are quantifiable and will exceed the significant costs associated with their de-
velopment, startup and operation.
We believe that mandating participation in RTOs by public power is unnecessary.
The LPPC believes that this provision should be deleted from H.R. 3406. As noted
above and in previous testimony, public power has constraints that limit our ability
to fully participate in RTOs. Without resolution of the private use issues, accommo-
dation of state and local statutory constraints, and preservation of our obligation to
serve our native load, LPPC members cannot participate in RTOs. We have gen-
erally been able to address our concerns through negotiation and compromise on an
individual basis and continue to believe that this is the optimal means for achieving
the objective of a functioning, successful RTO.
FERC-LITE ISSUES
FERC-lite and Private Use

In the past, the LPPC has supported proposals to ensure that all market partici-
pants have access to the transmission system on a fair and open basis. FERC-lite,
as contained in Section 201, is such an open access policy. It would require public
power entities to provide transmission services at rates that are not unduly dis-
criminatory and require non-rate terms and conditions to be comparable to those re-
quired of the investor-owned utilities. However, as noted above, absent adequate
private use reform, public power will be unable to provide open access transmission
service due to the existing legal constraints. For this reason, our support for the
FERC-lite concept is predicated on the removal of these legal constraints. We
would ask that the bill include a provision recognizing this constraint and condition
185
adoption of the requirements of FERC-lite on public power on the resolution of pri-
vate use issues.
While we recognize that this Subcommittee does not have direct jurisdiction over
the private use issue, we appreciate the Subcommittee Chairs support of the indus-
try consensus tax agreement that was introduced as H.R. 1459 by Congressman
Hayworth. Earlier this session, the House passed H.R. 4, the Securing Americas
Future Energy (SAFE) Act. H.R. 4, as passed by the House, addresses private use
issues, but contains a number of changes to the private use provisions of H.R. 1459
that frustrate the aim of opening up and expanding the transmission grid. The
Hayworth bill represented a landmark consensus agreement between public power
and investor-owned utilities forged at the request of Congress, and all parties be-
lieve it strikes an appropriate balance with respect to removing restructuring-re-
lated tax impediments. However, the private use provisions in H.R. 4 were modified
in significant ways and these changes make H.R. 4s private use provisions unwork-
ableand in some respects, worse than current lawfor public power. We ask the
Subcommittees assistance in ensuring that these key private use relief provisions
are revised and modified so the original objectives sought by this agreement are
achieved. We also ask that H.R. 3406 include language recognizing this constraint
on public power and limiting our obligations until this issue is resolved.
Uniform Refund Authority Cancels out FERC-lite
The LPPC has very serious concerns regarding the provisions contained in Section
702 of H.R. 3406, which would amend Section 206 of the Federal Power Act. The
Uniform Refund Authority provisions would allow FERC to set just and reasonable
rates (and order limited refunds) for: (a) public power transmission to jurisdictional
public utilities; and (b) public power wholesale sales to jurisdictional public utilities.
This would largely negate the limitations on the Commissions ratemaking authority
over public power transmission that are an integral part of Section 201 of the bill,
known as FERC-lite. The Uniform Refund Authority provision would subject public
power wholesale sales and transmission rates to review by FERC on FERCs own
motion or whenever such rates are challenged under Section 206. While public
power systems would be able to set their own rates in the first instance, these rates
could, at any time, be reset by FERC. If so reset, the public power system could
then be required to pay retroactive refunds. In our view, the Uniform Refund Au-
thority provision, as drafted, cancels out FERC-lite and imposes unworkable,
after-the-fact rate regulation on public power entities.
FERC-lite was designed to ensure that public power entities and cooperatives pro-
vide open access transmission services on non-rate terms and conditions that are
comparable to those required of investor-owned utilities. However, while it required
transmission rates to be non-discriminatory, it did not authorize FERC to set just
and reasonable transmission rates for such entities. But, because Uniform Refund
Authority authorizes FERC to set just and reasonable rates for any public power
transmission to a jurisdictional utility, the FERC-lite limitations on FERC rate-
making are cancelled out. Section 702 should be deleted.
Uniform refund authority also applies to public power wholesale sales to jurisdic-
tional public utilities. We believe that giving FERC this new authority is unneces-
sary and likely to discourage sellers from participating in the market. The uniform
refund authority provision is backwardsrather than telling market participants
what the market rules are ahead of time, it allows FERC to start up a regulatory
proceeding, decide what the market rules are, and then apply them retroactively
and require refunds for up to 15 months. This is no way to regulate.
These provisions also pose significant practical problems for many LPPC mem-
bers. As not-for-profit entities, most LPPC members do not retain surplus revenues
at the end of the fiscal year. For instance, MEAG Power operates on a one-year ac-
counting system. Each year, any surplus revenues realized during the course of the
year are redistributed and returned to our customers. Other LPPC members may
return the surplus to their cities. What this means is that each year MEAG Power
zeros out our books. As a result, were we required to issue a refund fifteen months
after the fact, we would not have the profits to do so and would be required to
either raise our rates or levy an assessment against our customers to obtain the
funds.
FERCS AUTHORITY OVER MERGERS SHOULD BE STRENGTHENED, NOT ELIMINATED
The discussion draft would repeal the Public Utility Holding Company Act
(PUHCA). It would also repeal FERCs current authority to review investor-owned
utility mergers and asset sales. If PUHCA is repealed, FERCs merger authority
under section 203 of the Federal Power Act should be strengthened, not eliminated.
FERC must be provided with adequate tools to review mergers, including holding-
186
company-to-holding-company mergers, and to prevent abuses of market power. The
LPPC believes, at a minimum, that the draft should be revised to give FERC clear
authority over holding company-to-holding company mergers and over generation-
only transactions.
CONCLUSION
As the Subcommittee continues to move forward with electricity legislation, the

LPPC offers our continued assistance. We would be happy to work with the Sub-
committee and its staff to properly tailor FERC transmission jurisdiction to the
unique structures and responsibilities of public power systems, ensure market
power and merger protections for consumers, and retain the appropriate level of
flexibility for FERC as it approves new RTOs. However, I must again stress that
any comprehensive electricity legislation must meaningful private use reliefeither
in the same bill or in companion legislation from the tax committeein order to be
workable.
We look forward to working with the Subcommittee on comprehensive electricity
legislation that addresses our concerns, garners wide support and can ultimately be
enacted. I will be happy to answer any questions you have.
Participation by LPPC Members in RTO/ISO Development

Austin Energy .............................................. Participate in the ERCOT RTO, which is operational
Chelan County Public Utility District .......... Participating in RTO West discussions
Clark Public Utilities ................................... Participating in RTO West discussions
Colorado Springs Utilities ........................... Was involved in early discussions on DesertSTAR and currently reviewing
TransLink and DesertSTAR proposalsno RTO activity currently in Colorado
Jacksonville Electric Authority ..................... Sponsor of the SeTrans proposal
Knoxville Utilities Board .............................. Not a transmission owner
Long Island Power Authority ....................... Participant in New York ISO, which is operational
Los Angeles Department of Water & Power Participated in the development of the California ISO Tariff; Key participant in
the Transmission Access Charge discussions; Opted not to join California
ISO
Lower Colorado River Authority ................... Participant in ERCOT RTO, which is operational
MEAG Power ................................................ Sponsor of the SeTrans proposal
Memphis, Light, Gas & Water Division ...... Surrounded by TVA; participates in RTO discussions to the degree TVA does
Nebraska Public Power District .................. Sponsor of the TransLink Transco which has filed a proposal with FERC;
TransLink has agreed to join the MISO
New York Power Authority ........................... Participant in NYISO, which is operational
Omaha Public Power District ...................... Sponsor of the TransLink Transco which has filed a proposal with FERC;
TransLink has agreed to join the MISO
Orlando Utilities Commission ..................... Was involved in the RTO discussions of Grid Florida, which is on hold pending
the Florida PSC hearing.
Platte River Power Authority ....................... Was involved in discussions on DesertSTAR; no RTO activity currently in Colo-
rado
Puerto Rico Power Authority ........................ N/A
Sacramento Municipal Utility District ......... Opted not to join the California ISO until certain issues are resolved
Salt River Project ........................................ Participating in development of the WestConnect Transco proposal
San Antonio ................................................. Participant in ERCOT RTO, which is operational
Santee Cooper ............................................. Sponsor of the SeTrans proposal
Seattle City Light ........................................ Participating in RTO West discussions
Snohomish County Public Utility District #1 Participating in RTO West discussions
Tacoma Public Utilities-Light Division ....... Participating in RTO West discussions
Mr. BARTON. Thank you, Mr. Johnston. We appreciate you being

here. I am tempted to ask for unanimous consent to move the bill
right now since it is myself and Mr. Ganske here, and he is for the
bill, or at least he was last week. So that wouldnt be right.
The Chair would recognize himself for 5 minutes of questions, or
until other Members, in addition to Mr. Ganske, return. I have got
so many questions that I really dont know where to start. I am
told, Mr. Hyman, that you have to leave in about 5 minutes; is that
correct?
Mr. HYMAN. Something like that.
187
Mr. BARTON. Okay. So let me kind of get you to square off

against Mr. Rouse. Mr. Rouse says that we really dont need these
incentive rates if I understood him correctly, that there is adequate
transmission being built.
The Chairwoman of the Arkansas Public Utility Commission also
said that she wasnt real sure that incentive rates were necessary,
although she wasnt automatically opposed to them.
I am told that the demand for electricity is growing twice as fast
as the announced capacity increases in transmission.
So it would seem to me that we need something to get more
transmission built. So, Mr. Rouse, if we are not building the trans-
mission that we need today according to all of the Department of
Energy and Energy Information Agency, why not try incentive
rates for transmission?
Mr. ROUSE. Mr. Chairman, I think the reason why we are not
has more to do with what local opposition has
Mr. BARTON. Well, now, the Chairwoman of the Arkansas Public
Utility Commission said, hey, they are siting all these lines, and
so do you think a little local opposition is stopping them?
Mr. ROUSE. Well, the local opposition will vary from place to
place, and what we really need I think is not a wholesale massive
additions to the system, but rather selected areas where we have
low pockets. The PATH-15 was mentioned by Congressman
Largent.
There are areas where we need new transmission to relieve con-
gestion, and I think as the demand there is such that we dont
need incentive rates to get that transmission built, we simply need
either the oversight of FERC as a kind of last resort, or some way
for the States and the local authorities to overcome local opposi-
tion.
Mr. BARTON. So you would just adopt the club them to death
mentality, and let somebody come in and do it that way?
Mr. ROUSE. Well, I think the club, you saythe last resort would
have to be that there should be some authority to recognize the
need. But as far as incentive rates for the transmission, I dont
think that would be necessary.
Mr. BARTON. Mr. Hyman, what is your response to Mr. Rouses
comments?
Mr. HYMAN. First of all, I think the numbers show that the ca-
pacity or the demand is growing four times as fast as the increase
in capacity. Second, my attitudethe reason that I am proposing
to use incentives is not necessarily to get someone to build a line.
I want to use an incentive to get this person to try to figure out
the best solution, and if the best solution is building a line, fine.
If the best solution is putting in some sort of facts device which ac-
tually increases the capacity of existing facilities, I want that to be
the solution.
I want to create a tariff arrangement which causes the trans-
mission company to find the best way to solve the solution for the
customer, and that is the reason for the incentive.
Mr. BARTON. Now, lets go to Mr. Prindle. I thought that we were
really encouraging distributed generation in our bill. You dont
think we are. What would we have to do to get you to say yes?
188
In other words, how can I get you to marry my bill? What do we

have to do, because I think we are really helping distribute genera-
tion, but you didnt think that.
Mr. PRINDLE. Well, we are focusing on energy efficiency here. We
do recognize that there are certain provisions that do provide some
encouragement for these kinds of technologies, and we do think
that there are some opportunities that are missed.
Things like the performance standard, and the more detailed
rules under Section 103, and things like that. It is a matter of de-
gree, I guess.
Mr. BARTON. So if we were just a little more specific, you would
like it better?
Mr. PRINDLE. Yes, a little more specific, and there is a couple of
specific provisions that we would like to see added, sure.
Mr. BARTON. Okay. Now, lets go to my two good friends, Mr.
Richardson, and Mr. English. I probably met with you two guys, or
your association, about as much as anybody at the table, and I
have had a good dialog.
I am not being facetious. I have enjoyed it. But you all were
somewhat negative on the bill, to be polite, and I guess I would ask
Mr. Richardson how do we have a national grid if we dont have
mandatory participation in the grid, which seems to be one of the
big bottlenecks from your group. You just dont want to have to be
told that you have to join.
Mr. RICHARDSON. By mandatory, are you talking about national
grid in terms of regional transmission?
Mr. BARTON. Yes.
Mr. RICHARDSON. I think that Mr. Johnstons comments were
right on target, in terms of public powers participation. You look
at the transmission owners and public power community, and they
are participating in regional transmission organization.
Now, in terms of the mandatory participation, I think there are
a couple of problems that I have tried to address in our testimony
and in my comments. One is the very prescriptive nature of what
is in the bill, in terms of its mandate and timing, and procedural
obstacles that are available to
Mr. BARTON. But I mean does your associationI would assume
that there are those in your association that do have some inter-
state transmission capacity; is that correct?
Mr. RICHARDSON. There are some that have interstate trans-
mission capacity, and there are some in my association that are
completely transmission dependent. It makes for an interesting dy-
namic, but let me
Mr. BARTON. I have only got 5 minutes, although I am the chair-
man. I can take more if I want to, especially since there are not
all that many people here. But I want to get the concept. I want
people to understand the concept.
We have been talking about a national grid for probably 10 to
15 years. Now, it is about time for the rubber to hit the road. We
have kind of a least common denominator bill in the Senate, which
is a great accomplishment for my friends in the Senate.
They have at least put out something. I love them for that. It is
not comprehensive, and it doesnt address all the controversial
189
issues, and as usual, it is up to the poor old nitty-gritty House of

Representatives to tackle the tough issues.
And one of the toughest issues is are we really going to have a
national grid. Mr. Richardson, do you think we ought to have a na-
tional grid on behalf of your association?
Mr. RICHARDSON. Yes, I do. I think we need to rationale
Mr. BARTON. Okay. Thank you. Mr. English, do you think we
ought to have a national grid?
Mr. ENGLISH. Indeed.
Mr. BARTON. Okay. Now, there are two ways to do that, or three
ways. We can make it voluntary, and just pray that everybody sees
the same issue. We can put incentives, or we can go a combination
of that, but ultimately make it mandatory.
Now, I have gone around that track every way I could. I have
tried voluntary, and I have tried incentives, and I am now in the
position after 3 years of being chairman of this subcommittee, I
want to have incentives, and I want to make it voluntary, but at
the end of the day, if you have to join, you have to join.
So we give you a year to join and work out the details, and par-
ticipate however you want, but at the end of the year under the
current bill, if you still havent joined, the FERC can tell you that
you have to. Now, with regard to the Co-Ops, we tried to make it
as easy as possible.
Mr. ENGLISH. Well, we appreciate that, too, Mr. Chairman.
Mr. BARTON. And I was told that you had a conversation with
the full committee chairman, and that on behalf of your trade asso-
ciation that you had a few minor things that you wanted worked
out. Well, I listened for 5 minutes and you listed a number of
minor things.
Mr. ENGLISH. Well, the point, and that is what I was attempting
to get at, Mr. Chairman.
Mr. BARTON. Well, my time has expired. Answer the question
and then I will go to Mr. Ganske.
Mr. ENGLISH. Well, the thing that I was trying to get at with
what I was saying is that I think there is agreement on the objec-
tives. Certainly there is from us as to what you are trying to do.
The point that we are coming down to is that we think that we
are missing the mark in what we are doing. Now, you are talking
about the emphasis with regard to RTOs, and the issue of how that
is handled.
We think certainly that the Federal Energy Regulatory Commis-
sion obviously has to play that role. We think that there should be
a lot of local involvement with RTOs.
Mr. BARTON. I agree with you.
Mr. ENGLISH. In other words, a lot of what we are talking about
is process. A lot of what we are talking about also is thisand this
is particularly true for us, is this big question of independence.
Are those RTOs truly going to be independent, and is FERC
going to have the authority to make sure that they are inde-
pendent, or are we going to be able to go in there and not be in
effect taken over.
And that is what thisyou know, we can talk about incentives,
and we can talk about mandatory, and we can do this, and we can
190
do that, but the real hang up that we are into is this question of
is it really independent. Is FERC really going to make sure
Mr. BARTON. That the RTO is independent?
Mr. ENGLISH. Exactly.
Mr. BARTON. Okay. Well, we can work on that. My time has ex-
pired. We recognize Mr. Ganske for 5 minutes.
Mr. GANSKE. Thank you, Mr. Chairman. About a week ago I gave
a talk at the Des Moines morning rotary, and I asked the 150 peo-
ple that were there how many of them either through their mutual
funds or individual investments had an exposure to Enron.
And about two-thirds of the people raised their hands, and so I
want to pursue this a little bit. I thank all of you for coming, and
Mr. David Sokol, I thank you, from coming from the Midwest.
Mr. Sokol, your testimony says that the problems with Enron
shouldnt stop us from doing electricity legislation because these
problems are primarily about bad investments and misuse of ac-
counting. Do you have any personal expertise to base this on, or
is that just your conjecture?
Mr. SOKOL. Thank you, Congressman. Unfortunately, yes, I do,
both directly with Enron, but more sadly in 1992, I was asked to
become president of the company that 4 months later I turned into
the SEC for serious accounting fraud that had been perpetrated
over a 5 year period.
And the Enron situation, being an active participant in the mar-
kets both that they participate in nationally, as well as directly in
the midwest, the energy markets have not been disrupted at all by
Enrons bankruptcy.
Certainly banks, and unfortunately employees, and shareholders,
and many of the creditors of Enron, have been severely impacted.
But it is not an issue relevant to 3406. It is, however, and on be-
half of both myself and Mr. Buffett, who takes these issues very
seriously, changes need to be made, because I think a follow-up ef-
fect of when a corporation the size of Enron is caught doing what
it has been doing, falls as fall and as fast as it has done, it cannot
help but harm confidence in the United States securities markets.
And that is an issue that may not be relevant in todays hearing,
but it is unquestionably important to be acted on quickly, and
again Enron is not unusual. JWP, the company that I mentioned,
Waste Management, Sunbeam, and many others, we have lost the
obligation to follow not only the letter of accounting, but the intent
of accounting.
Mr. GANSKE. Mr. Sokol, I think it is really important to distin-
guish between Enron and the companies that are represented at
your table. I wondered if you could expand on that. What is the dif-
ference between your company and Enron, or the other utility com-
panies?
Mr. SOKOL. Well, first of all, I think it is important to make a
difference. First of all, the Public Utility Holding Company Act,
which is a discussion that has been part of this conversation, did
nothing to stop Enron from doing what it was doing.
It did nothing to stop PG&E from going bankrupt in California,
and it did nothing to stop Southern California Edison from being
bankrupt in California. Enron is an independent power company,
and it happens to own a utility in Oregon.
191
I think it is important to note that the only two assets that

Enron owns of any substance today that are not bankrupt is Port-
land General Electric, which was protected by the State Regulatory
Commission in Oregon, and not PUHCA, and interstate gas pipe-
line systems that Enron owns that are also regulated by FERC and
certain State regulatory bodies.
And what Enron did, and by the way, what Enron has done is
not unique in our industry. And it is not unique in a lot of indus-
tries, and it needs to be considered and looked at carefully.
They inflated earnings inappropriately, and they used off-balance
sheet treatments to avoid rating agency scrutiny, and perhaps
many other activities that we are not yet aware of. I dont believe
that the regulated utilities in this country participate in those ac-
tivities.
If they do the management and their auditors should be fined
and go to jail.
Mr. GANSKE. So, as we look at repealing PUHCAI mean, what
kind of assurances can we give consumers?
Mr. SOKOL. Well, PUHCA actuallyand with all due respect to
the U.S. Congress, we have been talking about repealing PUHCA
for 18 years. PUHCA and the distortions that are created by out-
dated and ineffective regulation are what create the opportunities
for the kind of accounting abuses and misuse of markets that you
are seeing with Enron.
PUHCA has nothing to do with having stopped that. What it
does stop is credible players like ourselves and others from being
more involved in the industry, and frankly helping stop things like
that from happening.
It had nothing to do to stop it, and it didnt stop it, but the provi-
sions of 3406 would in fact help stop it by actually making access
to all the books and records of every holding company in the
United States available to those State regulators.
As an example, Portland or the State of Oregon could have asked
for the books and records of the rest of Enron underneath 3406.
They did not have the right to under todays regulatory regime
with PUHCA in place.
Mr. GANSKE. So let me just repeat that. Your contention is that
had the chairmans bill been law that it might actually have helped
prevent the Enron problem?
Mr. SOKOL. I believe thats correct.
Mr. GANSKE. Mr. English, did you want to make a comment also?
Mr. ENGLISH. I did. I think there is something that we may be
missing here a bit on the Enron thing, and I am going to agree
with you. I dont think that PUHCA obviously didnt prevent Enron
from happening and so forth.
But the issue that we have got moving into this environment is
and certainly the COMPACs that our members have had, and the
impressions that we have gotten, you are dealing with a bunch of
folks that were swashbucklers.
You were dealing with a bunch of folks that quite frankly were
arrogant, and you were dealing with a bunch of folks that were
going to do it their way because they thought they had this thing
all figured out.
192
And whether there were laws broken or not I have no idea, but
I think that certainly as we get into this kind of a marketplace
with competition in what has been previously been a regulated in-
dustry, I think it does attract that element.
And I would suggest to you that if you are going to repeal
PUHCA, then you darn well better put something in place to pro-
tect the consumers, or you are going to have more of this kind of
activity just because that is the kind of folks that are attracted to
this kind of a marketplace.
Mr. GANSKE. So you would agree with Mr. Sokol that the trans-
parency provisions in this bill are pretty important?
Mr. ENGLISH. Well, I think we need to go further. I think that
we need some good solid consumer protection version. I think we
need to have an exchange. If you are going to repeal PUHCA and
say that PUHCA no longer is relevant here, then you have got to
have some solid consumer protection to make sure that they are
protected against this element.
Mr. BARTON. The gentlemans time has expired. We may have
time to come back for a second round.
Mr. GANSKE. Thank you, Mr. Chairman.
Mr. BARTON. The gentleman from California, Mr. Waxman.
Mr. WAXMAN. Thank you, Mr. Chairman. Mr. Prindle, thank you
for your testimony today. I know that you and The Alliance to Save
Energy are widely respected for your expertise on these matters.
It is critically important for all of us to understand why the cur-
rent structure of our electricity system often discourages efficient
use of energy, and why restructuring will make that problem
worse.
Would you please walk us through what has happened to invest-
ments in energy conservation over the past decade, and would you
also explain how the market structure encourages us to expand
transmission and generation even where conservation measures
would be a less expensive way to meet demand.
Mr. PRINDLE. Well, certainly. As I mentioned in my testimony,
over the last 5 to 6 years, we have lost half of the investment we
used to have in energy efficiency programs, and that is largely be-
cause States backed away from their former commitments to inte-
grated resource planning, in which the utilities were vertically inte-
grated monopolies.
And there was a logical framework in which if you wanted to
build a power plant, you could do analysis to see if there were de-
mand-site options which were more cost effective before committing
to that capital investment.
Well, now with restructuring, we have a virtually fully deregu-
lated generation sector in which a utility at the State level cant
really say anything about generation, and cant even determine an
avoided cost for generation because the utilities that it regulates
dont own generation.
So we have essentially lost the framework that used to exist that
allowed for the kind of planning to make rationale resource deci-
sions. Right now in the generation markets there is an active dis-
incentive for generators to save energy.
And in fact if you look at Californias market, there is a lot of
evidence that very high demand and very peaky demand actually
193
increases revenues to generators, and it encourages market behav-

ior to maximize that effect.
Unfortunately, over the last summer, we have seen an 8 percent
drop in demand in this State because of energy efficiency and other
kinds of investments that have really taken the rug out from under
that kind of supply oriented behavior.
So we clearly need that kind of risk management if you will on
the demand-site to offset the inherent disincentive that exists in
the wholesale markets as they are today.
Mr. WAXMAN. Do you see anything in this bill to either provide
funds for investments in energy efficiency or establish require-
ments to improve energy efficiency?
Mr. PRINDLE. Well, we dont see enough. In Section 103, there is
a provision to require FERC to foment the proliferation of demand
response programs, and we think that is a positive thing.
However, there is nothing specifically that enables energy effi-
ciency to participate in those demand response markets. So, we
have offered some specifics to encourage that. But beyond demand
response, we think there is a need for a broader approach to en-
courage energy efficiency and related resources.
Mr. WAXMAN. If we dont have a broader approach, and if we
dont have other substantive measures in legislation, can we really
expect to overcome the market barriers to energy conservation that
you have discussed?
Mr. PRINDLE. Well, not the way that markets are running now.
As I have said, generators only make money when sales go up, and
the same is true for distribution companies as long as States con-
tinue to use a through put base regulation in which volume of sales
determines revenues and profits.
Some States have gone to a different form of performance-based
rate making where that is not the case. But right now most dis-
tribution companies again are net losers in energy efficiency pro-
grams.
Mr. WAXMAN. Well, we heard from the administration yesterday
that they support energy efficiency, renewable energy, and environ-
mental protection. And Mr. Blake pointed to some provisions in
this bill as furthering those goals.
But in your opinion they are not enough?
Mr. PRINDLE. We certainly would like to see more in the bill, yes.
Mr. WAXMAN. I was disappointed that the majority did not grant
our request to invite a witness to speak about renewable energy
today. This bill directly addresses renewable energy, but only in a
negative way. It would repeal Section 210 of PURPA, which has al-
lowed renewables to start to compete in energy markets.
And since we dont have a renewable energy witness here today,
I would like to ask you, Mr. Prindle, does anything in this bill ei-
ther provide funds for renewable energy, or establish requirements
to develop renewable energy?
Mr. PRINDLE. Well, I am not a renewables expert, and The Alli-
ance has no specific position on that. We do work with a lot of our
colleagues in the renewables world through the sustainable energy
coalition, and we are equally disappointed that those folks were not
invited to testify.
194
And we would suggest that at a future hearing that those folks

be included in the discussions.
Mr. WAXMAN. If I might just take another second or so. The ad-
ministration agreed yesterday that they thought that the legisla-
tion should support renewable energy. Instead, I think the bill
would increase our reliance on old and polluting energy sources.
It is a critical topic, and it deserves more attention. Mr. Alden
Myer, of the Union of Concerned Scientists, is a renowned expert
on renewable energy, and I would like to ask for unanimous con-
sent to insert his testimony into the record.
Mr. NORWOOD [presiding]. Without objection, so ordered.
Mr. WAXMAN. And I want to conclude by pointing out that a new
study by the North American Commission on Environmental Co-
operation demonstrated the link between electricity restructuring,
increased demand for electricity, and increased air pollution.
And I think that we ought to keep that in mind, and I was dis-
appointed that we didnt have any part of this hearing devoted to
the air pollution consequences of energy legislation. So I want to
make that point for the record.
I would ask you some questions about it, Mr. Prindle, but I have
run out of time. But I assume that you agree that there is an air
pollution consequence to energy policies, and we ought to realize
that there is an interconnection between the two?
Mr. PRINDLE. Absolutely.
Mr. WAXMAN. Thank you, Mr. Chairman.
Mr. NORWOOD. I would now like to recognize Mr. Walden for 5
minutes.
Mr. Walden. Thank you, Mr. Chairman. I would like to follow up
on one of these issues of energy efficiency. I know that I have been
in small business for nearly 16 years, and every light socket that
will take a fluorescent light bulb I have put in.
And I know that a lot of people are doing the same thing in their
homes, and looking for other energy efficiency. Hasnt energy effi-
ciency actually gone up, Mr. Prindle?
Mr. PRINDLE. The question is whether energy efficiency has gone
up?
Mr. Walden. Yes. Isnt the market responding, and arent con-
sumers responding?
Mr. PRINDLE. Well, in the State of Oregon, it is, Mr. Walden,
largely because there has been a 20 year history of investment
through the municipal utilities, and the Bonneville Power System,
and the Northwest Power Planning Council, and now the new Or-
egon energy trust.
There is a sustained and now even an increasing commitment to
implementing the fundamental policies and creating the incentives,
and the market transformation programs. But in most States, we
dont have that.
Mr. Walden. Okay. But I also know that one of the things that
spurred me along, and some of my neighbors, was a proposed in-
crease of 46 percent by Bonneville. That kind of gets our attention
more than aI mean, I am participating in some of the State pro-
grams, too.
195
We replaced a washer and dryer, and the Energy Star Program

provides for some tax benefits for buying upscale dryers basically,
and you are going to save on energy in the long run.
But it just seems to me that the market also plays a role, and
I am a very strong advocate, and in fact I supported one of Mr.
Waxmans amendments last spring to make more use of renew-
ables, and demand-site reduction issues are a concern as well.
One of the troubling parts for me in this bill and in general is
that, one, there are the 29 States out there that have the so-called
net metering programs that have engaged in some of these other
programs to reduce demand and provide for efficiency.
And I want to make sure that we dont upend their apple cart
through this. But beyond that, it is just the philosophical debate
about demand reduction. You can only go so far before you shut
down your economy, because if I am in business and I make more
money by selling off the power that I dont consume, and not oper-
ating the plant that I have, I may be forced to do that from a finan-
cial standpoint.
But it doesnt do much for our economy does it? And I think we
have to be careful about how much we put on that side, as opposed
to creating more generation opportunities, and a grid that works.
Mr. PRINDLE. That is a very good question, and we are very com-
mitted at The Alliance to working with the market. We have 70 as-
sociate members, many of whom are the major manufacturers of
energy efficient technology.
And I can say that the analysis that has been done does show
a net positive impact on the economy from energy technology. For
example, The Rand Corporation did a study of Californias effi-
ciency programs, and found that for every dollar invested in effi-
ciency that a thousand dollars on net came back into the economy.
And, in fact, in the year 2000, about 3 percent of the gross State
product was related to investments in efficiency. So we believe that
energy efficiency and a growing economy actually go hand-in-hand.
And our efficiency performance standard doesnt purport to stop
economic growth, but only to mitigate the rate of electricity de-
mand.
And we have seen this over the last 25 years in the economy
with a 40 percent increase in GNP with almost flat energy growth.
Mr. Walden. So there has been.
Mr. PRINDLE. And the key here is to keep the economy growing
while moderating demand growth so that we can put the cap
over
Mr. Walden. Well, I guess that is what I was getting at initially.
I thought I had read where there has been fairly extraordinary en-
ergy efficiency, but my biggest concern is that we are going to end
up at some point in a recession and a snapback that we are going
to be right back to where we were last spring talking about black-
outs again, and lack of energy supply if we are not careful.
And so I want to make sure that what we do in this bill gets us
a grid out there that will work, and a marketplace that will func-
tion that wont end up sticking the consumers along the way.
And that gets us to some of the issues about the RTOs and I
would be curious to hear what you have to say as to that. I know
that I have heard from some of my co-ops. And I apologize for not
196
being here for all of your testimony, but I am curious as to your

comments on that.
Mr. ENGLISH. I think that an assurance that it is clearly inde-
pendent. I think that the regulation is there and in fact the empha-
sis is there in enforcementand the concern I think is that they
are going to be swallowed up and they are going to be taken over,
and they are going to have their assets used in a manner that is
contrary to their best interests.
And so thats where time and time again we hear this concern
arising and I dont think that emphasis is there in this legislation,
and I dont think we are seeing that emphasis as far as FERC at
this particular point in time, not to the degree that we would like.
Mr. Walden. My tine has expired, Mr. Chairman. Thank you.
Mr. NORWOOD. Thank you, Mr. Walden, for those very insightful
questions, and ending on time. Now I would like to recognize my
friend from Ohio, Mr. Sawyer, for 5 minutes.
Mr. SAWYER. Thank you, Mr. Chairman. Mr. Gent, NAERC is the
sector coordinator for the electric industry under the Presidents
Commission on Protection of Critical Infrastructure for 1996. You
just came out this past spring with a report and recommendations.
But adherence to those recommendations is voluntary, as with
most recommendations. Are you satisfied that there is sufficient
voluntary progress in meeting those recommendations?
Do you think that it would be appropriate to build a more de-
fined and perhaps mandatory role for an electric reliability organi-
zation to have the authority to enforce standards for protection of
critical infrastructure?
I mean, we have heard a great deal of talk about generating ca-
pacity, particularly nuclear and fuel storage dumps around the
country as weapons in place. But I am frankly just every bit as
concerned about the vulnerability of the grid to this sort of thing,
and I was wondering if you could comment on that.
Mr. GENT. Mr. Sawyer, the solution is right here in your legisla-
tion. I think that the self-regulating reliability organization can be
extended into including national security interests.
I have heard a lot from the Department of Energy and other gov-
ernment agencies talking about standards. We have yet to define
what they would like to have as standards. But should we decide
as a Nation that we want to have some kind of security standards,
uniform security standards, for energy facilities, we think that
needs to be debated in an open way.
And once the standards are implemented, they need to be man-
datory. I think industry itself is in the best position to enforce
those standards. There would have to be government oversight like
there is in all SROs. But I think that what you are proposing in
your legislation would do that also.
Mr. SAWYER. Critical vulnerabilities, and just identifying them is
an incredibly important first step.
Mr. GENT. Yes, and it is also critically important that we dont
create a list so that everybody knows what those are.
Mr. SAWYER. I understand. Thank you. Mr. Sokol, I wish Mr.
Hyman were still here, but let me ask you. You suggested that we
direct FERC in your testimony to review its transmission pricing
policies, and you spoke about that a little bit.
197
And yet we heard from FERC yesterday that they think that
they have the authority to do what needs to be done, although they
wouldnt mind having a little bit of additional emphasis on that re-
state of direction.
Could you give us a sense of how you think innovative pricing
policies would work in the business of developing the kind of ongo-
ing reliable capital investment that the grid needs, and the kind
that Mr. Hyman talked about, and why you think that FERC may
have been so far reluctant to act on the authority that they believe
that they have?
Mr. SOKOL. Well, first, Congressman, I strongly agree with what
I think is one of the most important elements of this bill, is dealing
with transmission, because we do have a vulnerable transmission
system, both purely as an energy delivery system for this country,
remembering that it was brown from a patchwork quilt, and not as
a national system.
It grew together and it did not grow intelligently.
Mr. SAWYER. He sounds like me 4 years ago doesnt he?
Mr. SOKOL. Thats a compliment. Thank you. The issue of incen-
tive pricing, first of all, should not be taken as an absolute in our
view in any sense other than the recognition that as you move from
a patchwork quilt of 1,800 participants owning transmission in this
country, to 5 or 10 RTOs, or whatever the right number is, that
you have got to find a mechanism to incentivize the construction
of transmission that may not be an obvious need.
As an example, in our area, we could make additions to trans-
mission that would allow the power to be moved to several other
States, including Iowa, to Kansas during certain peak times be-
cause of the way that load shifting has occurred over the last 20
years.
There is today no mechanism for us to be compensated or any
of the other three participants, one of which is a public power agen-
cy, to be compensated for making that addition if that power
doesnt flow; i.e., a cooler summer, and Kansas City doesnt nec-
essarily need the power flow.
It may, however, be an absolutely essential piece of a redundant,
highly reliable grid system that that transmission piece be made.
And what we are really speaking to is merely that traditional
forms of finding the capital to do that may need to be enhanced,
whether that is an incentive or whether or not it is merely the rec-
ognition at State and Federal levels that putting in $100 million
here may provide something that doesnt have direct compensation
tied to it, but national security issues.
It is a reliability issue and things of that nature. So I think that
giving FERC that ability and perhaps us all working harder to
prod them to use it where it is necessary, and explain the reasons
for it, is ultimately in the consumers interest. And whether we
make the investment or someone else does is really irrelevant from
our standpoint.
Mr. SAWYER. Just an observation, Mr. Chairman. It seems to me
that those kinds of investments, carefully done, and appropriately
compensated, can go a long way toward getting rid of the kinds of
price distortion practices that we saw recently caused by trans-
mission bottlenecks. Thank you, Mr. Chairman.
198
Mr. NORWOOD. Thank you very much, Mr. Sawyer. I would like
to now, and it is a pleasure now, recognize a gentleman from New
York for 5 minutes.
Mr. FOSSELLA. Thank you, Mr. Norwood. For Mr. Gent from
NAERC, and I guess a question from a New York perspective. Cur-
rently there are special rules in place for the Metropolitan region
in New York City in order to be able to quickly respond to any dis-
turbances in the transmission system, and reduce the likelihood of
blackouts.
The rules include such things as temporarily reducing the level
of imported energy, and starting up expensive gas turbines in the
Metro region, and fuel switching at certain generating stations.
They are overseen in some cases by the Public Service Commis-
sion, and maintains a detailed familiarity with the specifics of the
New York system. I say that because as I see one of the sugges-
tions that NAERC makes is that there will be a national standard.
And I am just more curious as to how you would envision this
one national standard, and its relationship to what New York City,
given its unique circumstances, what that relationship would be?
I guess what I am saying is that there is a sentiment that we
dont want to see those standards or rules relaxed, and that the
standard that is ultimately implemented on a national level lower
than that, we would just be curious as to how New York City
would fare?
Mr. GENT. Congressman, I can assure you that we dont want to
see lower standards for New York City either. NAERC was born
out of the first Northeast blackout, which centered around New
York City.
And then there was the blackout of 1997 that gave rise to the
standards that you are discussing. The legislation as it is proposed
has allowances for special situations in various regions.
And whether it be a variance or not, there will also be conditions
where somebody will have a better idea for accomplishing the same
performance. And so that is all provided for in the way of
variances.
We have had long discussions with people from New York State,
and we think that their needs and concerns can be accommodated.
Mr. FOSSELLA. So New York will basically have the flexibility to
maintain its own standards separate and apart from
Mr. GENT. Yes, as long as there is ample demonstration that
they are not endangering the rest of the grid, which in this case
thats not the case, they will have standards that would be accept-
able to the rest of the interconnection.
Mr. FOSSELLA. Okay. Thank you. Thats all.
Mr. NORWOOD. I would recognize the Ranking Member, Mr. Bou-
cher, for 5 minutes.
Mr. BOUCHER. Thank you very much, Mr. Chairman. We all ac-
knowledge that we need to build new transmission lines in various
parts of the Nation, and there are some substantial differences of
opinion as to the proper approach for Congress to take in order to
encourage that.
The bill that is before us contains provisions for incentive pricing
for new transmission, and that is controversial in the minds of
199
some, on the theory that incentive pricing necessarily means higher

pricing, and that has a direct effect on electricity consumers.
Others may take the position that the market can be relied upon
to attract the capital necessary for new transmission line construc-
tion, and perhaps RTOs should be affirmatively empowered to take
whatever steps are necessary to bid out the construction, and to
manage the construction, and perhaps even to own the new lines.
And I would welcome views from our witnesses, perhaps starting
with Mr. Richardson and Mr. Hyman, to talk about the validity of
that latter approach. First, I know Mr. Richardson has some prob-
lems with incentive pricing, and you might briefly comment on that
and tell us what they are.
But more to the point, I am interested in knowing whether the
capital markets can be relied upon to supply the funding that is
necessary in the event that RTOs undertake the responsibility of
building lines.
That strikes me as a very interesting approach if it has merit,
and I would be interested in knowing if it has merit. So, Mr. Rich-
ardson, lets begin with you.
Mr. RICHARDSON. Thank you, Mr. Boucher. Yes, we do have prob-
lems with the incentive pricing provisions. Thus, what this sug-
gests is prices that are in excess of or rates that are in excess of
just and reasonable rates that are currently authorized under the
Federal Power Act.
And that as I said in my opening comments, just and reasonable
is a zone. It is not a fixed point. And it is set within that zone to
compensate for the risk of the investment itself, and we think that
gives the Commission sufficient latitude to encourage through rates
new transmission facilities.
The suggestion that you raised with respect to regional trans-
mission organizations and bidding out the construction of new
transmission facilities is one that I think makes a tremendous
amount of sense.
There are individual owners of transmission facilities who have
reasons not to build transmission or to maintain constraints be-
cause it is in their economic interests to do so, and that is a prob-
lem that needs to be overcome.
There is transmission that needs to be constructed because it is
in the public interest to do so. Yet, it may not be in the economic
self-interest of any single participant.
But it is in the regional interest, and Mr. Sokol pointed out an
example of where that could well be the case. If you have a re-
gional transmission organization that has the authority to bid out
the construction, there is money in construction, and you certainly
find people to construct if you can get over the siting problems.
You could certainly raise the capital because we have been able
to raise capital for transmission facilities, including the noted con-
strained PATH-15 in California under the current regulatory re-
gime.
And those facilities could then be owned by the regional trans-
mission organization, and rates set system-wide for that organiza-
tion, sufficient to cover the depth that was issued. So that seems
to me to make a lot of sense.
200
Mr. BOUCHER. That is the answer that I was hoping to hear. Let
me ask you this. Do we need to do anything legislatively in order
to enable RTOs to exercise that bid out and then construct oppor-
tunity?
I think that some States may have statutes that say that the
only entities that can build transmission are the certificated and
regulated utilities. Are you aware of this circumstance?
Mr. RICHARDSON. I am not aware of that. Obviously, a backstop
would be to specifically authorize if it is in the public interest for
the Commission to do so to allow regional transmission organiza-
tions.
Mr. BOUCHER. Okay. Thats fine. Thank you. Mr. Hyman, let me
ask you this. You heard the proposed structure hereoh, Im sorry.
Your nameplate says Mr. Hyman.
Mr. PRINDLE. Mr. Hyman was sitting to my left.
Mr. BOUCHER. I see.
Mr. PRINDLE. But if the Congressman would indulge me, I do
have something to say about that.
Mr. BOUCHER. I would be happy to hear what you have to say.
Please.
Mr. PRINDLE. Well, our forte is energy efficiency and not trans-
mission, per se. But we do work with companies that are in the
transmission technology business. And as most people know, there
are enormous losses in the transmission system.
The old steel core transmission lines that have been out there
since the 1930s are inefficient. They lose enormous amounts of en-
ergy, and they cause lines to sag, and hit pine trees, and cause out-
ages. That is what almost caused the whole Western system to go
down a couple of summers ago because a line sagged and hit a tree.
There are new technologies, like composite materials, out there
that can increase the through put of transmission lines substan-
tially. But in order to do that, there have to be incentives out there
to invest in those new higher efficiency technologies.
And so just another way of supporting the idea that some sort
of incentive needs to be there to encourage efficiency within the
transmission system, as well as the construction of new lines.
Mr. BOUCHER. Okay. Yes, Mr. English. We will conclude with
you.
Mr. ENGLISH. Very, very quickly, I just want to make the point,
two things. One is we need to establish Federal standards with re-
gard to transmission lines, and new transmission needs to be built
of those standards.
Second, I dont believe that we have looked at the question of
why transmission is not being built. There are a whole host of rea-
sons. And third is we ought to open it up and let others build
transmission other than the established utilities, and invite others
to come in and build this transmission and get it done. And,
fourth
Mr. BOUCHER. Including RTOs?
Mr. ENGLISH. Yes, indeed. Indeed. And, fourth, I think we get
down to the whole question that incentive rates, if any money is
going to be derived out of incentive rates, they must be used to
build new transmission and not for any other purpose.
Mr. BOUCHER. Okay. Thank you. Mr. Chairman, my time is up.
201
Mr. NORWOOD. Thank you, Mr. Boucher. I now recognize myself

for 5 minutes. I would like to thank all of you lady and gentlemen
for being here, but I particularly want to thank Robert Johnston
for being here from Georgia.
These types of little gatherings are always very helpful to us. I
am sorry that Chairman Barton has already left, because my first
question was to him as he was talking about incentivizing people
to go into RTOs, I wondered if he would define incentive.
They can be negative and they can be positive and it is going to
be very important in my view which way we try to encourage peo-
ple to do that. Perhaps all of you know that yesterday we had the
FERC Commissioners here, and Chairman Wood, and we had some
rather lengthy discussions regarding FERC orders and studies, or
maybe the lack of studies.
Now, Mr. Johnston, I want to talk to you specifically about RTOs
just for a minute. I am very concernedand part of that is that
many of my constituents seem to be very concernedabout what
the bottom line is going to be; what effect these RTOs might have
on rates.
With respect to some of the FERC policies, I think it is for sure
that they have not measured cost benefits in regards to these
RTOs. Are you aware of any cost benefit studies that Chairman
Wood has conducted on the issue of RTOs?
Mr. JOHNSTON. I believe that they have recently initiated cost
benefit studies at the urging of many in the industry, and those are
underway. I dont believe that there have been any impartial inde-
pendent comprehensive studies done to date that I have seen.
Mr. NORWOOD. Well, he indicated that perhaps that would be in
our future, but things are moving pretty fast. I would like if we are
going to do that, I would like to see it done as soon as possible.
Is it possible that RTOs may not be as effective in some regions
of the country as they might be in other regions of the country?
Does this concern you, and if it does, now is a good time to talk
about that.
Well, we have said that those studies need to be regional and the
reason they need to be regional is that we have different cost struc-
tures, and different transmission needs, and different issues region-
ally.
And I know in particular the LPPC members in the Northwest,
and in the Southeast as well, both being low cost regions have con-
cerns about out of control costs for the RTO without corresponding
benefits to offset those costs.
And when you are in a low cost State, it is a little more difficult
towe believe it will be a little more difficult to generate a positive
cost benefit. We are not saying that it cant be done, but we are
saying that it will be more difficult in a low cost State for obvious
reasons.
And going back to the mandatory participation in RTOs, it be-
comes particularly difficult for us to be mandated into an RTO that
has a negative cost benefit.
Mr. NORWOOD. So in a State like ours, we have to be a little bit
concerned, because apparently I think Georgia is doing pretty well,
and that if we arent very, very careful some of these good ideas
are going to end up costing our rate payers more money.
202
Mr. JOHNSTON. They may.

Mr. NORWOOD. As we talk of moving into a new system, and
market place for electricity, I would like for you to take a minute
and tell us how all of this will effect my 48 cities in Georgia about
tax exempt financing?
Mr. JOHNSTON. Well, the tax laws for a long time, both Alan and
myself, and many others, have insisted that the tax laws, and the
private use provisions of the tax laws, has got to be changed, or it
is essentially a non-starter for us.
We cant enter the RTOs and offer up our assets under the cur-
rent provisions because we would violate those tax laws. Those
have got to be changed as a prerequisite to entering RTOs, even
if the RTOs are cost beneficial.
Mr. NORWOOD. Those tax laws are fairly new arent they? I
mean, it hasnt alwaysthat has been a change for you, the tax
law itself; is that not correct?
Mr. JOHNSTON. There is a current tax law that is still in a tem-
porary form, I believe, but you could make that permanent, but
that does not take care of all of the issues that we have under the
tax code. It is the 1987 tax law that actually applies today, but we
still need to make revisions to that effectively in our RTOs.
Mr. NORWOOD. The red light is on. I am certainly not through,
and Mr. English, I am going to get into this with you in just a little
bit in the next round on the RTOs. But at this timewell, who is
next? Well, Ms. McCarthy, I believe you are next for 5 minutes.
Ms. MCCARTHY. Thank you very much, Mr. Chairman, and I
thank the panels for their expertise here today. PUHCA has been
amended three times, and I know that you are aware of that, by
the Congress to permit diversification into independent power in
telecommunications and foreign utility companies.
But each time this committee has okayed an exemption, it has
ensured that the State Regulators had a role in approving the di-
versification or the letter of investment, particularly whenever
State regulated existing utility assets could be involved in the new
venture.
This bill before us repeals PUHCA without any similar State
role. I am a former State legislator. So, for full disclosure, I am
coming from that particular point of view.
So it just gives the States the right to see the books, and the
records of the company.
But in light of Enron, is this enough. And also following up on
an issue that Representative Waxman raised earlier with regard to
if PUHCA is eliminated that the negative effect of that on renew-
ables, I wonder if you would speak to what extent that there
should be incentives or a renewable portfolio standard in any com-
prehensive electricity restructuring legislation.
And also what you think would be a realistic goal for a RPS by
the year 2010 or 2020, so that we could have those thoughts in
mind. And I would welcome a response from any of the panelists
on both of those questions. Mr. Sokol.
Mr. SOKOL. Mine is specifically on PUHCA. The assurances that
Congress has received in the past were in fact accurate. That the
States do in fact have access to stop the types of diversification, et
cetera, within the State regulated utility.
203
That would be unchanged under 3406, as well as in the

Bingamam and Daschle Senate bill, because PUHCA is merely the
books and records, and affiliate issues would actually be expanded
at the State level to all utilities today, and books, records and affil-
iate abuse activities only are available to PUHCA companies.
Those that arentas an example, Portland General Electric,
which is owned by Enron, is not subject to the Act. So what this
Act would do is actually expand that books and records authority
to every State.
And as I mentioned before, one of the most important points that
I think to recognize in Enron is that the only new assets that
Enron has that arent of any substance that arent bankrupt today
is Portland General Electric and its interstate pipeline gas activi-
ties. And that is because both of those were protected by State reg-
ulations, and not by PUHCA.
Ms. MCCARTHY. I think that I want to clarify where I am coming
from in this question. Yes, I think the expanded involvement with
the books and assets, and all of that is important.
But the fact that the State regulators will no longer have a role
in approving diversification nor the level of investment was what
the thrust of my question was about; and, yes, it is nice that they
can go out and examine those things, and that has been expanded.
Mr. SOKOL. But States do have the ability to stopand as an ex-
ample. The reason Enron was not able to make a mess out of Port-
land General Electric is the State didnt let them. Enron could not
pledge the assets of Portland General Electric.
It could not borrow money to use in its derivative activities
against those assets because of State regulation, and not because
of PUHCA. The only thing that PUHCA does today is that it stops
companies like ourselves, a Triple-A rated company, Burcher-
Hathaway, from investing in the industry.
It does not stop a utility from making bad decisions at its holding
company level elsewhere in the industry, and I think that is a key
distinction.
Mr. ACQUARD. Congresswoman, if I may jump in here.
Ms. MCCARTHY. Yes, please.
Mr. ACQUARD. I agree with my friend that the Public Utility
Holding Company Act would not have prevented the Enron situa-
tion, but I think it is very clear or I think it is clear that what it
did prevent was the Enron situation getting worse.
And I say that because the Public Utility Holding Company Act
helps structure the industry to encourage single-State systems, and
not multi-State systems. And once you get into a multi-State sys-
temfor example, if the Enron Company had purchased another
utility, the Holding Company Act would have kicked in.
Now, I dont know what their business plan was, but I would
guarantee you, or I can almost guarantee you that they did not get
into other utilities because they did not want to get covered by the
Public Utility Holding Company Act.
And there are many ramifications of that, one of which is non-
energy related businesses they would have to sell off. So if they
were involved in any non-energy related businesses, if they pur-
chased a second utility, then they would have had to have spent
off some of the other businesses.
204
So it is not so muchthe beauty of the Public Utility Holding

Company Act is not what it does. Its what it prevents from being
done.
Ms. MCCARTHY. I think that was my concern all along, because
in a multi-State Holding Company, how does the State control that
big company if we eliminate PUHCA? And I very much appreciate
your response to that.
I would also like to hear your thoughts on renewables if we
eliminate PUHCA. What kind of portfolio should we have, and how
do we put incentives in to make sure that we have reached reason-
able goals in 2010 and 2020?
It is a part of the solution that we seek for energy security in
this Nation, and that we get off our dependence on imports and we
start looking at renewables. And in particularly in electric utility
restructuring the obvious has been studied and is there, and on a
small scale happening, and so how do we increase that by incen-
tives if we are going to eliminate PUHCA?
Mr. ACQUARD. Well, again, as perhaps wanting to be heard on
this, as one of the largest renewable energy generators in the
world, PUHCA has not either helped or inhibited renewable gen-
eration because it is a non-regulated entity.
And we have just announced an expansion of 170 megawatts of
our renewable energy in California, and we have well over a thou-
sand megawatts of renewables around the world. PURPA on the
other hand, on a prospective basis being removed, we dont be-
lieveand again as one of the largest players in the industry, we
dont believe that it will in fact slow down renewable generation as
long as open transmission access is in fact achieved through a bill
like 3406.
So that we actually have the right to get on to the grid system
and utilize the grid system with fair and reasonable rates. We
would certainly be in favor of a renewable utilization standard, ei-
ther in the State level or the Federal level. But since it would be
self-benefiting, I probably should not give a level.
Ms. MCCARTHY. Do you have an estimate on goals in 2010 and
2020, realistic goals?
Mr. SOKOL. Realistic goals on the order of 6 to 7 percent would
be certainly encouragable.
Mr. NORWOOD [presiding]. Thank you, Ms. McCarthy. Your time
has expired.
Ms. MCCARTHY. Im sorry, Mr. Chairman. You have been most
gracious.
Mr. NORWOOD. Thats all right. I understand.
Ms. MCCARTHY. I thank you very much.
Mr. NORWOOD. The gentleman from Oklahoma is now recognized,
Mr. Largent, for 5 minutes.
Mr. LARGENT. Thank you, Mr. Chairman. As one who has been
following this debate for a number of years, it is interesting to me
to hear a number of our panelists in their testimony this morning.
It seems like not that long ago that we were hearing that what-
ever we do in restructuring that we dont hand FERC too much au-
thority, and that is a very bad thing. And maybe that was a
Hecker-lead FERC, and we dont want to give them too much au-
thority.
205
And now it is a Pat Woods led FERC, and we are hearing dont
be too prescriptive to FERC on how RTOs are formed, and so and
so forth. And it used to be that when we started talking about a
comprehensive restructuring bill that we could click off about 3 or
4 things that there was fairly broad agreement on.
And like right out of the bat it was PUHCA and repeal. Done.
Interconnection. Done. Reliability standards. Done. Those were like
the easy things. Now, lets get into the harder things, in RTO for-
mations, and so on and so forth. Transmission.
And now we are back to where the PUHCA repeal is even con-
troversial. I mean, there is a number of our panelists who have tes-
tified that it is a bad thing that we repealed PUHCA.
I guess my question that I dont have for any specific panelist,
but I would be glad to listen to, is why now that we dont want to
be too prescriptive when we talk about RTO formations.
Why shouldnt that be the responsibility of Congress? Lynne?
Ms. CHURCH. Well, Mr. Largent, I think that FERC already has
a tremendous amount of jurisdiction, although there are challenges
to that jurisdiction, to enable the markets to go forward, and to en-
able the establishment of RTOs.
And while we have always encouraged making sure that FERC
had adequate jurisdiction, I think now what is being seen by some
who are opposed to a competitive market is that FERC is really
trying to exercise that authority.
And now there is pushback from those who really do not want
to see that exercise done. I think that has resulted in this reversal.
Mr. LARGENT. But at the same time, you are just one election
away from seeing that change again potentially, right? I mean, why
wouldnt you just want to statutorily say this is how we are going
to form RTOs and this is what they should look like?
Ms. CHURCH. I dont want to statutorily say that.
Mr. LARGENT [presiding]. I know. I am saying why dont you?
Ms. CHURCH. Because I believe that FERC, even under Chair-
man Hecker, and certainly under Chairman Moeller, and under
Chairman He bert, and now Chairman Wood, have all agreed that
we have to move forward.
And they have all tried in various ways, and dependent upon
what the atmosphere was at that time, to move forward toward
setting up RTOs in really regional vibrant markets. I think the cir-
cumstances both in the industry and in the make-up of the Com-
mission, and in the make-up of Congress, have changed enough
that now we are seeing a recognition that FERC has a tremendous
amount of authority and expertise, and perhaps they should be
doing or exercising that themselves without a lot of restrictions.
But at the same time, we are now seeing the push back I think
from those who are really concerned about their exercise of that ju-
risdiction.
Mr. LARGENT. Well, the other question that I had wasand this
is a little bit baffling to me, toothat I know that we have had
panelists here just this year that have come and testified, Goldman
Sachs and so far, and saying that one of the reasons that new
transmission is not being constructed is because there is incentive
to do that.
206
That the rate of return that is allowed by FERC is not high

enough, and so that is kind of what has spawned the incentive-
based rate. Everybody is shaking their head like that didnt hap-
pen. I was right here and the gentleman was sitting in that chair
who said it.
He maybe wasnt from Goldman Sachs, but that was what he
said, and we can get the testimony from anyone who wants to dis-
agree with me. But anybody have any comments on why incentive-
based rates wont be helpful in building new transmission in this
country?
Ms. CHURCH. Well, if I could just follow up on that one as well.
I think incentive rates have a role, and I think FERC has adequate
authority right now to decide when it would be appropriate.
But I think the main reason that we have not seen more trans-
mission bills was the uncertainty of what was going to happen in
the markets, and whether or not RTOs are going to be put in place,
and how quickly.
And so that uncertainty has had a cost, and second, of course,
the siting issues. That while no one has been able to cite a case
here where a State has turned down a transmission grid, we know
that getting a transmission line sited is very, very difficult, and
very time consuming.
And to the extent that it could be expedited by having a fallback
from FERC to exercise some authority, I think that it would be
very helpful.
Mr. LARGENT. Anybody else want to comment?
Mr. SOKOL. Yes, sir. Congressman, I think the issue of incentive
rates really kind of fall into two categories, and it is about defini-
tion of who is going to determine the need for the asset.
And if in today in our service territory, or I think in any munic-
ipal service territory, if for us to service our customers we need a
transmission line, we build it, and we find a way to get it sited and
we get it built.
The question is that with a national grid system, where there are
pieces of the system that need to be built to help a lot of folks, and
not necessarily my customers, if you are going to leave the rules
unclear, you are going to have to incentivize somebody to come in
and take the risk that it will get used.
Or you are going to have to have a body that determines its need
and determines how it is going to get paid for. If you do the latter,
capital will show up to do that. But it is a bit like adding a lane
on to an interstate. Is it for everybodys good, and then who pays
for it, or are you going to make it a toll road.
Most likely the person that puts in the toll road will expect a
higher return because he is running the risk that it will get used.
And I think we are going to need a mixture of those two, but either
will solve the problem.
A good portion of which really should be just resolved by having
the rules set out so that FERC, or an RTO, or someone can deter-
mine the need, and assess the costs reasonably to all the parties
involved in the RTO, and build it. That capital will be there if
those rules are clear.
Mr. LARGENT. Mr. English.
207
Mr. ENGLISH. In answer to your previous question, I think with

regard to the FERC issue, basically what it comes down to is that
this legislation is trying to regulate the regulators, and I dont
think that you can do that very well through the legislative lan-
guage.
You may be able to do that with the administration of programs,
but if you have got regulators out there and you dont like what
they are doing, and you want to regulate in their place, then you
ought to get rid of them.
And Congress can try to regulate directly. I dont think that is
going to work, but that would be the approach. If you look at this,
this is Congress trying to tell FERC that you have got to do this
or you have got to do that.
I would suggest to you that if that is what this committee wants
to do, it would be far more appropriate, and far more effective, and
certainly better for the Nation, if you simply called FERC up here
and tell them this is what we think you ought to be doing.
But to eliminate their discretion and to tell them specifically
what you are going to do, then you are trying to take their place,
and you are trying to regulate for them.
Now, we have hadI would totally agree with you that you have
serious disagreements, depending on who the Commissioners are
and what actions are taken.
You know, we have disagreed with some, and in some cases we
thought they were doing a great job. And they are making their
call, but thats the reason that I think that it is far more appro-
priate to express displeasure in that manner rather than through
legislation.
Mr. LARGENT. Mr. Acquard.
Mr. ACQUARD. Just to give you a real world example. A couple
of weeks ago we had our annual conference up on Philadelphia,
and my folks traveled out to PJM, which many consider one of the
most successful operating RTOs today.
And one of the questions that my members asked was do you
need incentive rates and siting authority to do your job, and they
said absolutely not. We are operating properly without them. So
the short answer to your question is that they are not needed.
Mr. LARGENT. Well, I guess my only argument to that, and spe-
cific to that area of the country, is that it tookand I think that
this is fairly analogous, is that it took forever to get another nat-
ural gas pipeline built to the northeast part of the country because
of all of these issues that we are talking about, and that we are
trying to address in electricity.
So it is an issue. I mean, they can tell you that it is not a prob-
lem to deal within their RTO, but when you are trying to connect
hopefully what will be a national power grid, thats where the prob-
lem comes in, and that is what we are supposed to be dealing with.
We are not supposed to be getting into what happens in the
State of Pennsylvania. Thats Pennsylvanias issue. What we are
talking about is making sure that we have an interconnected na-
tional bulk power grid.
Mr. ACQUARD. And then didnt think that was a problem either.
208
Mr. LARGENT. Well, I can tell you that there is a lot of people
that are having trouble moving power across their grid that would
disagree with that. Mr. Chairman, I yield back.
Mr. NORWOOD [presiding]. Thank you, Mr. Largent. Mr. Wynn,
you are now recognized.
Mr. WYNN. Thank you, Mr. Chairman, and I thank the panelists
for coming here today. Let me ask first kind of a general question.
Is there anyone on the panel who strongly opposes bidding out the
construction of new facilities? Is there anyone that says that that
is a real problem?
Mr. JOHNSTON. As a matter of fact, the southeast SeTrans model
that we are negotiating with the other Southeast utilities does just
that.
Mr. WYNN. Okay. Great. The next question is that I believe that
it was Mr. Richardson who said that he felt that in terms of incen-
tive pricing that FERC had enough authority under just and rea-
sonable to accommodate the concerns that were raised.
Apparently, Mr. Sokol, do you disagree with that? I dont want
to kind of point a finger at you, but I just wanted to find out if
there was disagreement with that analysis?
Mr. SOKOL. Under the historic structure, no, I dont disagree.
Mr. WYNN. Is there anyone that feels strongly that we should not
grandfather in State and net metering?
[No response.]
Mr. WYNN. I believe, Mr. Richardson, that you said that there
needed to bethat in the absence of PUHCA, there was at least
some momentum toward repealing PUHCA, but in the absence of
PUHCA, there needed to be some market or some protection for
consumers against abusive market power. What did you have in
mind?
Mr. RICHARDSON. Well, first of all, just to clarify a point earlier.
APPA at least has been consistently opposing or has been acknowl-
edging the fact that the modifications of the Public Utility Holding
Company Act are probably in the cards in this debate over industry
restructuring.
So in that sense there has been a consensus that the Holding
Company Act is an issue that needs to be addressed, but repeal is
not something that we have supported. And in fact, as you said, we
have endorsed the proposition that if you are going to take away
the consumer protection provisions of the Holding Company Act
that they need to be replaced by something else.
And the something else is that those other things need to be ex-
panded in FERC authority in dealing with the holding company
mergers, in addition to the authority that FERC already has; and
a reexamination of the standards under which FERC examines
mergers.
Perhaps the preservation of the authority to disband the holding
company and the so-called death sentence provision of the holding
company. If it is found that a holding company is operating utilities
or operating in ways that are detrimental to the interests of con-
sumers, as well as other market power provisions that we have
identified in previous testimony.
209
Mr. WYNN. I appreciate that, and if I could impose upon you, or

have someone from your group send me those alternatives in writ-
ing, I would appreciate that.
Mr. RICHARDSON. We would be happy to. There is a number of
other issues; affiliate abuse, protections, and so forth, and I would
be happy to do that.
Mr. WYNN. I would like to get that. Also, I believe you said that
you believe that in terms of access to records that it is too narrowly
drawn with respect to only costs. What additional government
records do you believe that Federal regulators ought to have be-
yond the, quote, costs?
Mr. RICHARDSON. It appears to us that the access to books and
records, assuming that the State Commissions are not asleep at the
switch and are doing what needs to be done to look at the books
and records, the provisions allow them to look at books and records
only with respect to rates charged.
Now, how broad is that or how narrow is that, thats an issue
that certainly would be subject to interpretation, but it is not clear
to me that it goes all the way to affiliate transactions, and poten-
tials for affiliate abuses.
Transactions to the holding companies, and structure, and the fi-
nancial posture and structure of the holding company itself rests
over on top of the operating utilities.
So it is not clear that all of those books and records that have
to do with the operations of the holding company actually could be
obtained under the provisions that are in this provision.
Mr. WYNN. If I could impose upon you again to provide me with
that information, I would appreciate it.
Mr. RICHARDSON. I would be happy to.
Mr. WYNN. I wont impose again, but I thought that was useful.
Now, I guess the final point that I would just make is that we are
giving or proposing to give FERC broad authority, but it seems like
we are narrowly construing the authority in that critical area.
So I think that it is important that we have the maximum ability
to look at all of the records. The imposition of wholesale strategy
and costs by FERC; I have a concern about that. Is there anyone
that has a concern about whether or not States ought to be
Mr. RICHARDSON. Well, if you are referring to the section on the
wholesale costs for
Mr. WYNN. Right.
Mr. RICHARDSON. In cases where communities would like to es-
tablish their municipal electric utility system, we are very con-
cerned about that. That is a provision that is in our view com-
pletely unnecessary, and would make the creation of new public
power systems, or even the exploration of new public power sys-
tems cost prohibitive.
States have the authority to deal with this issue, and FERC is
a back stop to deal with this issue on a case-by-case basis. Addi-
tional legislation is not necessary. In fact, it is counterproductive.
Mr. WYNN. Thank you very much. I see that my time is up.
Thank you, Mr. Chairman.
Mr. NORWOOD. Thank you, Mr. Wynn. Mr. Markey, you are now
recognized.
210
Mr. MARKEY. Thank you, Mr. Chairman, very much. Mr. Rich-
ardson, if Enron had been an SEC regulated registered holding
company, it would have had to have undergone prior SEC review
of its corporate and capital structure, including its equity, its debt,
and its relationships with its affiliates; is that right?
Mr. RICHARDSON. Thats correct.
Mr. MARKEY. Now, do you think that the SEC would have grant-
ed prior approval to the types of disclosure documents, capital
structures, and insider deals with all of those shadowy partner-
ships that we have been reading about?
Mr. RICHARDSON. It seems unlikely.
Mr. MARKEY. Now, PUHCA also restricts the ability of registers
to diversified into unregulated business areas; isnt that correct?
Mr. RICHARDSON. Yes, it is.
Mr. MARKEY. And even in those areas where Congress has au-
thorized some diversificationsexempt wholesale generation, for-
eign utility investments, telecommunicationsthat Congress has
placed certain restrictions on such investments in order to protect
utility operating companies from failed diversifications; is that
right?
Mr. RICHARDSON. Yes, they have.
Mr. MARKEY. Now, your testimony suggests that the only real
benefit of repealing PUHCA is that it allows large multi-State util-
ity holding companies to merge and grow even larger by acquiring
operating utility companies all over the country, and to diversify
into other non-utility businesses; is that correct?
Mr. RICHARDSON. Yes.
Mr. MARKEY. So if we do what H.R. 3406 recommends, what is
to prevent the next Enron from being a large utility holding com-
pany and the bankruptcy of that company from harming utility
consumers in a crisis far worse than the collapse of Enron?
Mr. RICHARDSON. In my view, very little, and I think that is the
point that Mr. Dingell was making earlier today about what if the
Act were repealed and Enron were to become a holding company.
Mr. MARKEY. Well, great minds think alike.
Mr. RICHARDSON. Yes, they do, sir.
Mr. MARKEY. If I can restate that now. Now, Mr. Sokol, the SEC
was not regulating Enron on-line as a broker dealer; isnt that cor-
rect?
Mr. SOKOL. Nor as a public utility holding company.
Mr. MARKEY. So, Enron on-line was not subject to the provisions
of the Securities Exchange Act that are normally applicable to
broker dealers, and these include holding company risk assess-
ment, large trader reporting, capital rules, margin requirements,
audit trails, broker-dealer record keeping, front running, and other
anti-manipulation and anti-fraud rules.
So, Enron was not subject to any of those rules as far as I under-
stand the situation.
Mr. SOKOL. Well, first of all, Congressman, as you know, I am
not a defender of Enron by any stretch of the imagination. But I
believe that Enron is subject to the rules of every public company,
and of proper disclosure of its financials, and proper and full disclo-
sure to its investors of the risks, and all information necessary for
intelligent investment decisions.
211
And so I think certainly a large portion of the SEC rules, Enron

was subject to, and should have been responding to.
Mr. MARKEY. Well, do you think that this subcommittee should
consider regulating the over-the-counter markets in which Enron
operated, including both the markets for physical delivery of elec-
tricity and the OTC electricity derivatives markets?
Mr. SOKOL. I think it definitely at a minimum should hold hear-
ings and very seriously look at those issues, in addition to poten-
tially revamping the methods for the criminal and civil penalties
for improper disclosure, both for company management, as well as
auditors.
Mr. MARKEY. Do you agree that if we repeal PUHCA that we
need to retain and strengthen FERCs merger review authority so
that the market power issues are dealt with?
Mr. SOKOL. Well, I think first of all that PUHCA clearly should
be repealed, and as you said yourself, and I think Congressman
Dingell indirectly as well, PUHCA did absolutely nothing.
In fact, in many ways as Congressman Sawyer said, PUHCA al-
lowed an Enron to exist, and it in no way resisted it. As to merger
powers, we are completely fine with FERCs review of mergers.
There are redundant merger review processes, and the only re-
quest we would have is merely that there be some level of time
commitment to review them in a prompt way and make a decision.
But market power issues clearly should be a major consideration
in those reviews.
Mr. MARKEY. Does anyone on the panel think that FERC should
not have strengthened review powers over mergers if PUHCA is re-
pealed?
[No response.]
Mr. MARKEY. Earlier on, Mr. Sokol, you said that what Enron
had done with respect to its accounting practices, its off-balance
sheet items, and its special purpose limited partnerships, is not
unique in the energy business. How widespread are these prac-
tices?
Mr. SOKOL. Well, I would say that of companies like Enron, and
again the non-regulated sides of the business, it is more wide-
spread certainly than is helpful. I think we are already seeing
other companies unwind similar activities.
Mr. MARKEY. Well, what other companies are doing that right
now?
Mr. SOKOL. Well, yesterday, El Paso announced that it would un-
wind two of its off-balance sheet partnerships that were very simi-
lar to what Enron had. Again, El Paso is not a Public Utility Hold-
ing Company Act company, and PUHCA did not in any way pro-
hibit them.
And I believe that there are other folks in that sector that have
used accounting treatments that perhaps shouldnt be used in the
future.
Mr. MARKEY. Okay. And, Mr. English, Glenn, back when you
served in Congress, you had jurisdiction over the CFTC over there
at the Agriculture Committee, and during that time you may recall
that Congress passed the Futures Trading Practices Act of 1992.
And that authorized the CFTC to exempt over-the-counter de-
rivatives from regulation as futures, and this exemption was fur-
212
ther expanded during the last Congress when we passed the Com-
modity Futures Modernization Act.
Now as a result of those laws, the CFTC has virtually no juris-
diction over the OTC derivative markets, and hence over the activi-
ties of companies like Enron.
Mr. ENGLISH. Well, I hope that you also remember when I was
chairing that subcommittee that I strongly objected to that and felt
that those derivatives should be regulated.
Mr. MARKEY. Well, I am ready to serve up the great truth. Let
me finish. I have the big home run pitch coming.
Mr. ENGLISH. Okay. Dont make it too slow now.
Mr. MARKEY. Okay. I have to try and speak as slowly as they do
in the Southwest right now in setting up this pitch. So in light of
that, do you think we should consider giving FERC additional au-
thority over electricity trading markets and related derivative mar-
kets so that there is some Federal regulation over these things in
view of the fact that at that time you had great reservations about
granting those exemptions?
Mr. ENGLISH. And given that previous experience, I would say
whole-heartedly, yes. I dont think there is any question that we
need to focus more attention on these derivative devices that are
used to in effect evade any kind of oversight, and that is basically
what we are talking about here.
Mr. MARKEY. Does anyone on the panel disagree with Mr.
English?
Ms. CHURCH. Yes, sir.
Mr. MARKEY. Okay.
Ms. CHURCH. While I am not suggesting that it is inappropriate
for certainly Congress and the regulators to relook at the issue, I
would just strongly remind the Congressman and the rest of the
panel that Enrons core business of electricity tradingtheir plat-
form, and their other tradingwas not what brought them down.
It was not their problem. Their problem was in their debt lever-
age and in their disclosure process. In fact, their trading was in
fact their crown jewel, which was providing the cash-flow, and ulti-
mately it was the discipline of that trading market and the fact
that the counter-parties lost confidence in Enrons financial status.
Mr. MARKEY. So, what you are saying here for the record then
is that none of the debt, none of the problems, were in any way re-
lated to the trading practices that were going on. You are ready to
go on the record and say that?
Ms. CHURCH. Yes.
Mr. MARKEY. None of it?
Ms. CHURCH. Yes, that is my understanding.
Mr. MARKEY. So what did cause it, just so we can all understand
it if it wasnt that?
Ms. CHURCH. I think it was a lack of financial confidence that
was due to their disclosure about the level of debt which was not
what had been known before. And particularly in their off-balance
sheet partnerships, and the fact that there was increasing concern
about their disclosure in their financial statements. That is what
started the spiral eventually that I think brought them under.
213
Mr. MARKEY. I thank you, Mr. Chairman, for your tolerance. I

would just say that I think that a lot of their bad debt was related
to obviously this diversification strategy in my opinion.
And obviously derivators in the words of many people on Wall
Street are really just like nuclear weapons out there; and that if
not understoodand we know that there isnt a single CEO in
America that I know of that really understands derivatives, which
is why the higher 27 year olds that went to MIT, and who go
summa cum laude degrees in advanced math, and so they really
dont understand them.
So to say that they are over here in this OTC derivatives market-
place, and somehow or other the marketplace will work out, with
no oversight whatsoever, I think is a very dangerous game to play.
And I thank you, Mr. Chairman.
Mr. NORWOOD. Yes, sir, Mr. Markey, and let the record show
that to get back into your good graces you got 10 minutes of ques-
tioning done.
Mr. MARKEY. I thank you, Mr. Chairman.
Mr. NORWOOD. If the panel would indulge us, we would like to
ask a couple of more questions, and in a very limited time, to 3
minutes, and if we can have that understanding, I am going to
slam the gavel down in 3 minutes.
And so if you would be kind enough to answer just a couple of
more questions. Mr. Walden, you have 3 minutes.
Mr. Walden. Well, Mr. Chairman, for your good graces, I would
like 13, but I will take three. I wanted to follow up on PURPA be-
cause we have heard about it from the perspective of its impor-
tance to spawn these alternative energy production facilities.
But isnt there another side to PURPA? I mean, I have got a few
of those contracts in my district, and for 3 years I have heard from
some of those who have been stuck with them from the buying
side, and that it has been a burden on consumers, and on the rate
payers because the rate was higher than the market and they were
locked into those agreements.
Can you speak to that, because I think we have got to get a bal-
ance here on making sure that the renewables that we put on-line
are affordable to the rate payers.
Ms. CHURCH. I will speak to PURPA if I may. I think the manda-
tory requirement to buy that is in the bill really no longer makes
a lot of sense in this market.
Mr. Walden. You mean in the law?
Ms. CHURCH. In the law.
Mr. Walden. Not in the bill?
Ms. CHURCH. Sorry, not in the bill. Correct. The law currently
has a mandatory take requirement from utilities, and in this day
and age, and in this type of market, that really does not make
sense.
And we have not opposed eliminating prospectively the must-
take provision. There is one problem with the bills dealing with
PURPA, in that it does not eliminate the ownership restrictions
that are also currently in the bill. Excuse me, currently in the law.
But generally PURPAhas PURPA really spawned the competi-
tive industry? I think it has had a great deal of success in bringing
214
renewable facilities on-line, and I think it will continue, but I think

that the must-take provision no longer makes sense.
Mr. Walden. Another topic is that we have heard a lot about
Enrons problems, and how once their revenues were recalculated
and their off-balance sheet debt was brought into play, and then
it all began to link to one another, and as the debt appeared to in-
crease, it triggered other requirements.
And then the credit ratings went down, and it just got away like
a chain reaction. Then I noticed in the news recently that Cali-
fornia is saying that they want to renegotiate the contracts for
power that they just entered into earlier this year, which triggered
some companies to begin to put forward that their revenues might
be less than anticipated if that occurs.
And as a result, I think it was Cal-Plan if I have got this right,
and their stock began to tumble. Can any of you speak to what is
going on in California, because we spent all spring trying to figure
out what it was, and then about the time the market started to cor-
rect, they decided to enter into long-term agreements.
And I predicted then that they would be back once the market
straightened out complaining about these horrible long-term agree-
ments that they were forced to enter into.
Are we now beginning to see a sort of new bludgeoning over
these agreements?
Ms. CHURCH. Yes, sir, I believe you are, and we are unfortu-
nately. The powers that be in California took the correct step in
January and February when they entered into long term contracts
to supply most of the power.
Unfortunately, their timing was terrible. It was much too late,
and
Mr. Walden. After they had denied the utilities the ability to do
the same thing within a prior year period, right?
Ms. CHURCH. Thats correct.
Mr. Walden. So they entered the market at the wrong time and
into agreements that were long?
Ms. CHURCH. Thats correct. There were suppliers publicly offer-
ing the utilities long-term contracts at 5 cents, and 512 cents, or
6 cents, in the summer of 2000.
And had those utilities been allowed by the State Regulators at
that time and the State Legislature to do that, we would not have
been in the situation we were.
The Governors group bought at the top of the market, and those
are contracts that are bilateral contracts. They are enforceable con-
tracts. I have heard many of the suppliers say that they are willing
to discuss renegotiating those contracts if it results in mutually
beneficial results.
But those are enforceable contracts, but they in hindsight, the
Governor moved too slowly.
Mr. NORWOOD. Thank you, Mr. Walden. Your time is up. Sorry,
gentlemen. Mr. Boucher, you are recognized for 3 minutes.
Mr. BOUCHER. Thank you, Mr. Chairman. I have one question,
and Mr. Acquard, I will pose this to you. Those who are advocating
a removal of the Federal Energy Regulatory Commissions author-
ity to review mergers argue that the function of promoting competi-
tion can be performed very adequately by the Department of Jus-
215
tice, or the Federal Trade Commission, one or the other of which

would have jurisdiction in the event of mergers.
Tell meand this is for the benefit of the record, which we will
share with other members. What is it that the FERC can do, and
is uniquely positioned to do that these anti-trust enforcement agen-
cies are not?
Mr. ACQUARD. I think basically that they have an understanding
of the energy industry. The FTC and the Department of Justice
does not have that understanding. So we believe that it is impor-
tant that FERC continue to have a role in those mergers.
The concern ultimately is that unless you take a close look at the
mergers, and you have added authority on mergers, that we are
going to turn into a Bell system, turning to the telecommunications
area, where we will have fewer and fewer competitors, and we will
not have an agency that fully understands the industry that they
are regulating.
Mr. BOUCHER. So FERC has special knowledge which can and is
brought to bear on merger reviews?
Mr. ACQUARD. Absolutely.
Mr. BOUCHER. A deeper knowledge than the anti-trust agencies
possess?
Mr. ACQUARD. Absolutely.
Mr. BOUCHER. And FERC can utilize this knowledge to promote
competition more effectively than the anti-trust review can promote
it?
Mr. ACQUARD. Thats correct.
Mr. BOUCHER. Thank you, Mr. Acquard, and thank you, Mr.
Chairman.
Mr. NORWOOD. Thank you, Mr. Boucher. I recognize myself for
3 minutes. Mr. Johnson, you have 48 cities in your association in
Georgia. Now, over the past 20 to 25 years how much money has
your operation spent in investing in transmission infrastructure to
serve those customers?
Mr. JOHNSTON. We have between $300 and $400 million of tax
exempt bond investment in transmission in Georgia.
Mr. NORWOOD. And under this new system are you going to be
able to guarantee those customers that they will not experience a
brown-out when merchant plants in other States sell and transfer
electricity through Georgia transmission systems, and say up to
Mr. Markeys area?
Mr. JOHNSTON. Not unless we can successfully negotiate a native
load protection provision that we are negotiating. But without that,
we would not be able to guarantee delivery, no.
Mr. NORWOOD. Now, if you have brown-outs and you cant guar-
antee that delivery, who are we going to holler at? Are we going
to be mad at you or are we going to be mad at the RTO?
Mr. JOHNSTON. Well, I know that there is going to be a lot of hol-
lering going on, and I probably have plenty of it directed to me, and
there will probably be plenty of it directed at you and others.
Mr. NORWOOD. Well, Congressman Barton just pointed out that
they would be hollering at me, too. So, you seem to think that the
rate payers, the native load customers, should be given some kind
of priority consideration?
216
Mr. JOHNSTON. Yes, because frankly they have paid for that sys-
tem, and they are subject to the bond debt for the life of that debt,
and why shouldnt they have priority. It was built for them.
Mr. NORWOOD. You are talking about incentives that Congress-
man Largent was talking about. Had you known years ago that
this $300 to $400 million that you had invested in transmission
lines were going to be taken away from you and perhaps you could
only use it when somebody else says you could use it, would you
have had an incentive to build that transmission line?
Mr. JOHNSTON. No, we would not.
Mr. NORWOOD. And if we do have RTOs, there had better be
some incentives for new transmission?
Mr. JOHNSTON. Yes.
Mr. NORWOOD. And it needs to be incentives that we think will
last a few years and not be taken away as we might be talking
about doing that now, and with that, I yield back the balance of
my time, and I yield the chair to the dcairman.
Mr. BARTON. Thank you. I am not going to ask any questions. It
is 1:15 and I could debate with each of you and say something
funny, and you could come back with something smart, and all of
that.
We know where you are, and we appreciate you being here. We
have been messing with this issue foryou could say for the last
10 years. We certainly have been trying to do something for the
last seven, and I have been trying to do something for the last
three.
The bill before us is not a perfect bill, but it is a real attempt
at a balanced approach that tries to balance all the concerns that
you put on the table. We are going to continue to work with you.
I dont think some of you are as opposed to the bill as you have
said today based on what you have said off the record.
But I am not going to put you on the record when you said to
keep it off the record. I am going to check with Chairman Tauzin.
It looks like the House is going to be in session next week. We are
coming in at 6:30 next Wednesday, and we will be here all day
Thursday.
My intention is to schedule opening statements on the mark-up
Wednesday afternoon late, probably about four oclock, and then go
to mark-up on Thursday. That is an intention, and that is not a
declaration. I need to check that with the chairman, and obviously
I need to check it with Mr. Boucher and Mr. Dingell.
I would like to get this bill out of the subcommittee next week
if we have time to do it, so that we can set it up to go to the full
committee. I really want this Congress to move a comprehensive
electricity restructuring bill.
I think the time has come and I think we are close to consensus,
and there will never be the perfect time. I mean, if we wait 6
months or a year, there is always going to be something else.
The only real alternative in my mind to doing something close
to what we have got on the table would be a very slimmed down
bill that just gave explicit authority to FERC to do what they want-
ed to do.
And in my opinion that is an abrogation of the Congress to legis-
late. The Congress legislates and the executive branch implements,
217
and too many Congresses have punted to the executive branch be-
cause we are not willing to make tough choices on issues that there
is not total consensus.
So, I do appreciate each of you individually, and I do appreciate
the groups that you represent. I would encourage you and your
staffs to work with the member staffs and the leadership staffs on
constructive ideas to perfect the bill, in terms of amendments and
things that need to be added and deleted because it is now inten-
tion this afternoon to the opening statements next Wednesday, and
go to mark-up on Thursday.
So I want to thank you for your attention and thank you for your
participation, and with that, this hearing is adjourned.
[Whereupon, at 1:18 p.m., the subcommittee was adjourned.]

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House Hearing, 107TH Congress - The Electric Supply and Transmission Act of 2001

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THE ELECTRIC SUPPLY AND

TRANSMISSION ACT OF 2001

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

COMMITTEE ON ENERGY AND

DECEMBER 12 and 13, 2001

Serial No. 10781

Printed for the use of the Committee on Energy and Commerce

U.S. GOVERNMENT PRINTING OFFICE

For sale by the Superintendent of Documents, U.S. Government Printing Office

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

WEDNESDAY, DECEMBER 12, 2001

of our transmission grid, and more and more thats on an interstate

I see lots of people here in the audience who we have worked

Today, the Subcommittee starts two days of legislative hearings on comprehensive

bitrarily in balancing the need for new transmission against the

in their effort to form Regional Transmission Organizations to fa-

of nitrogen oxides and carbon dioxide were significantly higher last

that Illinois is the fourth in the Nation in the amount of planned

I strongly believe we need to promote the use of renewable re-

jority short-circuited efforts in the committee and on the floor to

Mr. MARKEY. No, but Mr. Chairman, let me askpoint of per-

abundant and flexible markets in the electricity marketplace of

Mr. NORWOOD. So ordered. Thank you, sir.

from Massachusetts, that is fine with me. I dont want us to get

PREPARED STATEMENT OF HON. GEORGE RADANOVICH, A REPRESENTATIVE IN

PREPARED STATEMENT OF HON. CHIP PICKERING, A REPRESENTATIVE IN CONGRESS

STATEMENTS OF HON. FRANCIS BLAKE, DEPUTY SECRETARY,

tens of billions, with a b, of dollars have stayed in customer pock-

The current lack of standardized interconnection agreements and procedures

Since beginning to grant market-based rates (rate deregulation) to public utilities

A. Investigations, Refunds and Penalties

congressional guidance through legislation that assists in articu-

A. RTO formation has been delayed at the expense of electricity customers

siting, and it seems to me that you have proposed a manner of pro-

Mr. BARTON. Yes, sir.

gaged in the interstate transmission, has to be a part of an RTO?

were applying to market-based rate authority, which is in effect a

Company Act, all of the inevitable consolidation in the industry

RTOs, I think that looking through those provisions, and there

Mr. GORDON. You had mentioned earlier in your testimony about

Mr. SHIMKUS. That is great. Commissioner Breathitt?

bilitating impediment to achieving the goal that we are all talking

Mr. SAWYER. Sure.

audit trail and recordkeeping authorities, large trading or large po-

Mr. WOOD. The statutory authority, yes. The technical expertise

Mr. NORWOOD. I am just warming up, boss.

ports, such as advocating net metering as well as distributed gen-

Mr. WOOD. Correct.

Mr. WOOD. We announced that we were doing the rulemaking on

Mr. BARTON. Okay. I want to give Commissioner Breathitt an op-

I have the highest opinion of your intellect and your willingness to

it carefully, and, as Commissioner Brownell stated earlier, we

interstate commerce, and, third, the project is in the public inter-

thing to an RTO, you do get around the very parochial nature of

Mr. NORWOOD. Tell me this: How many hundreds of millions of

thousands and thousands of people, then we are concerned when

Mr. Wood, since we agree there should be a sound policy basis

Now, I want those companies in an RTO; I think we all agree

deeply concerned about what we saw in California and it repeating

FEDERAL ENERGY REGULATORY COMMMISSION

THE DEPUTY SECRETARY OF ENERGY

ATTENDEES AT MEETINGS/DISCUSSIONS BETWEEN DEPUTY SECRETARY OF ENERGY

THURSDAY, DECEMBER 13, 2001